Vedder, Inc., has 7.1 million shares of common stock outstanding. The current sh

Question

Vedder, Inc., has 7.1 million shares of common stock outstanding. The current share price is $62.10, and the book value per share is $5.10. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.1 million, a coupon rate of 7.1 percent, and sells for 92.5 percent of par. The second issue has a face value of $36.1 million, a coupon rate of 7.6 percent, and sells for 91.5 percent of par. The first issue matures in 21 years, the second in 13 years. The most recent dividend was $3.40 and the dividend growth rate is 7 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent.

What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the company’s aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the company’s equity weight? (Do not round intermediate calculations. Enter your answer rounded to 4 decimal places (e.g., .1632).)

What is the company’s weight of debt? (Do not round intermediate calculations. Enter you answer rounded to 4 decimal places (e.g., .1632).)

What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Vedder, Inc., has 7.1 million shares of common stock outstanding. The current share price is $62.10, and the book value per share is $5.10. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.1 million, a coupon rate of 7.1 percent, and sells for 92.5 percent of par. The second issue has a face value of $36.1 million, a coupon rate of 7.6 percent, and sells for 91.5 percent of par. The first issue matures in 21 years, the second in 13 years. The most recent dividend was $3.40 and the dividend growth rate is 7 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent.

Explanation / Answer

1) Cost of Equity - Ke = d1/P0 + g , where d1 = expected dividend for the current year, P0 = Current price of the share and g= growth rate

Substituting values we have, Ke = [(3.40*1.07)/62.1] + .07 = 0.05858 + 0.07 = 0.12858 = 12.86 %

2) after tax cost of 1st debt-- to be found out by solving the following equation for k, by trial and error.

92.5 = 100 * PVIF (k,42) + 3.55*.66*PVIFA (k,42)

PV @ 3% = 100*0.2890 + 2.343*23.7014 =28.90+55.53 = 84.43

PV@ 2% =100*.4353+2.343*28.2348=43.53+66.15=109.68

actual rate can be estimated by interpolating = 2 + 17.18/25.25 = 2 + 0.68 = 2.68 %

Similarly for the second debt

91.5 = 100* PVIF (k,26) + 3.8*.66*PVIFA (k,26)

discounting with 3%, PV = 100*0.4637+ 2.508*17.8768 = 46.37 + 44.84 =91.20

                        2% PV = 100*.5976 + 2.508* 20.1210 = 59.76 + 50.46 =110.22

estimating actual rate we have = 3 - 0.3/19.02 = 3.01577 = 3.02%

The market value of the two debt issues

1st = 71.1 *0.925 = 65.7675 m

2nd =36.1 * 0.915 = 33.0315 m

total debt MV       = 98.799 million $

Weighted average cost of debt = (2.68*65.7675 + 3.02 *33.0315)/98.799 =

(176.2569 + 99.75513)/98.799 = 2.79367 = 2.79%

3) Equity and Debt weight:

   Equity market value = 440.910 m$

   Debt market value    = 98.799

   Total firm value         = 539.709

Equity weight = 440.910/539.709 = 0.8169

Debt weight   = 98.799/539.709 = 0.1831

4) WACC using MV weights

12.86*0.8169 + 2.79*0.1831 = 10.5053+0.5108 = 11.0161 = 11.02 %

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