Organic Produce Corporation has 7.6 million shares of common stock outstanding,

Question

Organic Produce Corporation has 7.6 million shares of common stock outstanding, 510,000 shares of 7.1 percent preferred stock outstanding, and 176,000 of 8.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for S64.10 per share and has a beta of 1.21, the preferred stock currently sells for S107.90 per share, and the bonds have 16 years to maturity and sell for 95.5 percent of par. The market risk premium is 6.85 percent, T-bills are yielding 5.55 percent, and the firm's tax rate is 30 percent. What is the firm's market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Ans 1 Market Value weight of Debt 176000*1000*95.5% 1680,80,000.00 23.66% Market Value weight of Preference Stock 7600000*64.10 4871,60,000.00 68.59% Market value weight of equity 510000*107.90     550,29,000.00 7.75% 7102,69,000.00 Cost Cost % Weight WACC Ans 2 Debt (8.83)*(1-.35) 5.7395 23.66% 1.358211 Preference Shares 7.1 7.1 68.59% 4.869755 Equity Rf+(Rm-rf)*Beta=5.55+(6.85*1.21) 13.8385 7.75% 1.072156 7.300121 Workings Cost of Debt YTM Present Value of callable Bond C*((1-1+r^-n)/r)+(P*(1+r^-n))                                                            955.04 At a semi -annual rate of 4.415% Present value becomes the current market value Hence , the cost of debt (YTM) is 4.415*2 8.83

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