5.6. Springfield Company has the following capital structure. It has 9 million s

Question

5.6. Springfield Company has the following capital structure. It has 9 million shares of common stock selling for $80 each. The stock will pay a dividend of $2.75 next year and this dividend is expected to grow at the rate of 10% annually. Springfield has just raised $130 million by selling 8% coupon bonds at par. Springfield Co also has 4 million shares of preferred stock, which pays a dividend of $2.50 annually, and the preferred shareholders have a required rate of return of 11%. Springfield has 35% income tax rate. Find the WACC of Springfield. Show solutions.

Explanation / Answer

WACC = E/V* Re + D/V* Rd * (1 – Tc) Where:     Re = cost of equity     Rd = cost of debt     E = market value of the firm’s equity     D = market value of the firm’s debt     V = E + D     E/V = percentage of financing that is equity     D/V = percentage of financing that is debt     Tc = corporate tax rate % of financing Market value of common stock = 720000000 58% Market value of preferred stock = 400000000 32% Market Value of coupon bonds = 130000000 10% Total Financing available 1250000000 100% Cost of Common Stock = 10% Cost of Preferred Stock = 11% Cost of Bonds = 8% Based on this information, the WACC is calculated on the formula given above as below : WACC = 720000000/1250000000*10%+400000000/1250000000*11%+130000000/1250000000*8%*(1-35%) 9.83%

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

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