Great Corporation has the following capital situation. Debt: One thousand bonds

Question

Great Corporation has the following capital situation.
                    Debt: One thousand bonds were issued five years ago at a coupon rate of 11%. They had 20-year terms and $1,000 face values. They are now selling to yield 9%.                    The tax rate is 37%
                    Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their                    $50 face value. They're now selling to yield 11%.
                    Equity: Great Corp has 108,000 shares of common stock outstanding, currently selling at $18.48 per share. Use the risk premium approach and assume a 3% risk                    premium

Explanation / Answer

Debt:

PV= 110PVIFA(9%,15)+1000PVIF(9%,15)=$1161.2138

Value of the bonds= 1161.2138x1000= $1161213.8

Preferred stock:

Price= 7.50/.11= $68.1818

value of Preferred stock= 68.1818x2000= 136363.64

Equity:

value of Equity= 108000x18.48= 1995840

Ke= 9+3= 12%

Total= 1161213.8+ 136363.64+1995840= 3293417.44

Wt of debt= 1161213.8/3293417.44=.35

Wt of equity= 1995840/3293417.44=.61

Wt of Preferred stock= 136363.64/3293417.44= .04

WACC= (9x.63x.35)+(11x.04)+(12x.61)= 9.74%

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