1. Full House Co. has the following information: -Beta=1.2, Market Risk Premium=
ID: 2750989 • Letter: 1
Question
1. Full House Co. has the following information:
-Beta=1.2, Market Risk Premium= 7%, Risk free rate = 3%
-A current price of common stock of $60/share, with 100,000 shares outstanding
-A preferred dividend of $10 with a current price of preferred stock of $100, and 10,000 shares outstanding
-5000 outstanding bonds with 20 years to maturity, paying a 5% coupon, and a current price of $1150 and 6000 outstanding bonds with 10 years to maturity, paying a 4%, and a current price of $1041.67
-Full House’s Tax Rate is 35%
Find the WACC for Full House Inc.
Explanation / Answer
Answer : Cost of equity Share Capital = Risk free rate + Beta ( Market rsik premium )
= 0.03+1.2(0.07)
=0.114 or 11.4%
Cost Of preference share capital = 10/100 = .1 or 10%
Assuming Face value of both bonds being 1000
Cost of bond with 5 year Maturity (Bond A) = 50/1150 = 4.35%(1-0.35) = 2.8%
Cost of bond with Maturity 10 Years (Bond B) =40/1041.67 = 3.8% (1-0.35) = 2.47%
Weight of Equity, preference Share and Bonds
WACC = 5.79%
Particulars Number outstanding Price Total Capital Weight Cost of Capital Weight * Cost of capital Equity Share 100000 60 6000000 0.31579 11.40% 3.60% Preference Share 10000 100 1000000 0.05263 10.00% 0.53% Bond A 5000 1150 5750000 0.30263 2.83% 0.86% Bond B 6000 1041.7 6250020 0.32895 2.47% 0.81% Total 19000020 1 5.79%Related Questions
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