The Good Life Co. has the following securities outstanding: -Firm has outstandin

Question

The Good Life Co. has the following securities outstanding:

-Firm has outstanding an issue of 11%, semi-annual coupon bonds, par value $1000 with 5 years remaining to maturity. The bonds currently sell at 110% of par. There are 10,000 bonds outstanding.

-The firms common stock currently is selling at $50 per share. Value Line reports the firm's beta as 1.5. The t-bill rate is 6% and the return on the S&P 500 is 11%. The firms last dividend (Do) was $2.00 per share & the dividends are expected to grow at a rate of 10% annually indefinitely. There are 2,000,000 common shares outstanding.

-Firm has no preferred stock in its capital structure

-The firms tax rate is 40%

Questions to be answered:

(a) Calculate the costs of the components to be used in the WACC. (LT Debt & Common Equity

(Take Average of 2 methods for common equity)

(b) Calculate the firms market value capital structure

(c) Calculate the firms WACC

Please show all your work to support your answers. Thank you!

Explanation / Answer

At 6%, PV = 1,573.50; at 8%, PV = 1,294.54; at 12%, PV = 925.31

Determine Annuity amount by using Face amount of Bond and Face rate of Interest. Here it is $110. But when using PV of $1 and PV Annuity tables, always use market rates, or YTM.

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