Organic Produce Corporation has 9.3 million shares of common stock outstanding,

Question

Organic Produce Corporation has 9.3 million shares of common stock outstanding, 680,000 shares of 7.3 percent preferred stock outstanding, and 193,000 of 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.80 per share and has a beta of 1.38, the preferred stock currently sells for $106.20 per share, and the bonds have 14 years to maturity and sell for 87 percent of par. The market risk premium is 6.95 percent, T-bills are yielding 5.65 percent, and the firm’s tax rate is 40 percent.

(a)

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).)

(b)

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).)

Organic Produce Corporation has 9.3 million shares of common stock outstanding, 680,000 shares of 7.3 percent preferred stock outstanding, and 193,000 of 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.80 per share and has a beta of 1.38, the preferred stock currently sells for $106.20 per share, and the bonds have 14 years to maturity and sell for 87 percent of par. The market risk premium is 6.95 percent, T-bills are yielding 5.65 percent, and the firm’s tax rate is 40 percent.

Explanation / Answer

Organic Produce Corporation Market risk Premium = 6.95% Risk free T-Bill rate= 5.65% Stock Beta                    1.38 Required rate of return for stock = Risk free rate +beta*Market premium =0.0565+1.38*0.0695 = 15.24% Rate of return for stock = 15.24% Preference dividend /share                    7.30 Preference share price                106.20 Cost of preference share =dividend /price= 6.87% Cost Of Bond YTM formula = {Interest payment+(Face value-Market price)/Years to maturity}/(face value+2*market price)/3 Details Face value                  1,000 Market Price                      870 Annual Interest                        85 Years to maturity                        14 YTM= [85+(1000-870)/14]/(1000+2*870)/3                     =10.3% Tax rate =40% Post Tax cost of debt = 6.18% a Type of Capital No Outstanding Market Price/unit Market Value Weight of Market Value Cost   Common Stock          9,300,000                65.8      611,940,000 71.82% 15.24% Preferred Stock             680,000              106.2        72,216,000 8.48% 6.87% Bond             193,000              870.0      167,910,000 19.71% 6.18% Total      852,066,000 b WACC = 0.7182*0.1524+0.0848*0.0687+0.1971*0.0618                        = 12.75% So WACC of the company = 12.75%

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