9,000 6.2 percent coupon bonds outstanding, with 20 years to maturity and a quot

ID: 2697877 • Letter: 9

Question

9,000 6.2 percent coupon bonds outstanding, with 20 years to maturity and a quoted price of 104. These bonds pay interest semiannually.

225,000 shares of common stock selling for $64.50 per share. The stock has a beta of 0.85 and will pay a dividend of $2.70 next year. The dividend is expected to grow by 5 percent per year indefinitely.

Calculate the WACC for Parrothead Enterprises. (Do not include the percent sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

You are given the following information concerning Parrothead Enterprises:

Explanation / Answer

Hi,

Please find the answer as follows: (for your clarification only - you need not rate this)

Cost of Debt

Coupon Payment = (1000*.062)/2 = 31

N = 40

PV = 1040

FV = 1000

R = ?

R = Rate(40, 31, - 1040, 1000) = 2.93*(1-.35) = 1.91*2 = 3.82%

Cost of Preferred Stock = 4.5/94 = 4.79%

Common Stock =Ã‚

Re = 5 + .85*(12-5) = 10.95%

Re = 2.7/64.50 + .05 = 9.19%

Re = (10.95 + 9.19)/2 = 10.07%

WACC

Market Value

Weights (A)

Cost (B)

(A*B)

Debt

9360000

0.380

3.81

1.45

Preferred Stock

752000

0.031

4.79

0.15

Equity

14512500

0.589

10.7

6.31

24624500

7.90

WACC = 7.90% (The answer is still not 7.53%. That could be on account of approximate values.

Thanks.