Market value of the firms capital sturcture as follows: Bonds 3,900,000 Preferre

Question

Market value of the firms capital sturcture as follows:

Bonds 3,900,000

Preferred Stock 2,000,000

Common Stock 6500,000

To finance the purcahse, ranch manufacturing will sell 10-year bonds payin 6.8% per year at the market price of $1,065. Preferred stock paying a $1.93 dividend can be sold for $24.31. Common Stock for Ranch manufacturing is currently selling for $54.15 per share and the firm paid a $3.03 dividend last year. Dividends are expected to continue growing at a rate of 4.8% per year into the indefinite future. If the firm's tax rate is 30%, what discount rate should you use to evalute the euipment purachse.

WACC is : ( round 3 decimal places)

Explanation / Answer

Hi,

Please find the answer as follows:

Cost of Debt = Rate(nper,pmt,pv,fv)

Nper = 10

PMT = 1000*6.8% = 68

PV = -1065

FV = 1000

Cost of Debt = Rate(10,68,-1065,1000) = 5.92%

After Tax Cost of Debt = 5.92*(1-.30) = 4.14%

Cost of Equity = D1/Current Stock Price + g = 3.03*(1+.048)/54.15 + .048 = 10.66%

Cost of Preferred Stock = Preferred Dividend/Stock Price*100 = 1.93/24.31*100= 7.94%

Weighted Average Cost of Capital = Weight of Debt*After Tax Cost of Debt + Weight of Equity*Cost of Equity + Weight of Preferred Stock*Cost of Preferred Stock

WACC = 3900000/(3900000 + 2000000 + 6500000)*4.14% + 2000000/3900000/(3900000 + 2000000 + 6500000)*7.94 + 6500000/(3900000 + 2000000 + 6500000)*10.66 = 5.601%

Answer is 5.601%

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.