Jefferson International has 4 million shares of common stock outstanding, 1 mill

Question

Jefferson International has 4 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and $75 million loans (from banks) outstanding. The common stock's price is $55 per share and the preferred stock's price is $45 per share currently. The common stock has a beta of 1.1. The preferred stock pays a $4 annual dividend per share. The average interest rate on loans is 9%. The risk-free rate is 3.5% and the market risk premium is 7.2% currently. The corporate income tax rate is 34%. Compute Jefferson's WACC.

Explanation / Answer

Market value of common stock = 4 * 55 = $ 220 million

Market value of preferred stock = 1 * 45 =$ 45 million

Market value of loan                   =                    75

Total market value = $ 340 million

Weight of common stock = 220/ 340 = .6471

Weight of preferred stock = 45 / 340 = .1324

Weight of loan = 75 /340                    = .2205

c)AFter tax cost of debt = 9 (1 -.34 ) = 5.94%

Cost of common stock = 3.5 + [7.2 * 1.1]

                                          = 3.5 + 7.92 = 11.42%

cost of preferred stock = D/ current price

                                     = 4 /45 = 8.89%

WACC = (5.94* .2205 ) +(11.42*.6471 ) +(8.89*.1324)

                = 1.310 + 7.390 + 1.177

                = 9.88%

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