This is a multipart question, can you please show the work on how you did the pr
ID: 2759516 • Letter: T
Question
This is a multipart question, can you please show the work on how you did the problems.
Cost of Debt:
30 year Bonds
Current Price 101.5% of par value
7.6 % Coupon Rate
Semi Annual Bond
12 years to maturity
Tax Rate: 40%
What is the Cost of Debt After Tax?
Preferred Stock
Dividend $7.50
Current Price $60.00
What is the Cost of Preferred?
Equity
Risk Free Rate 6.50%
Market Risk Premium 6.25%
Stock Beta 0.7
What is the Cost of Equity?
Debt/Equity
10,000 Bonds Outstanding Selling @ 101.5% of Par Value
43,000 Preferred Stock @ $60.00
300,000 Shares of Common Stock @ $40.00 per share
What is the WACC?
Explanation / Answer
K =Nx2
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^(Nx2)
k=1
K= 30x2
1015 = [(7.6*1000/(100*2))/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^30x2
k=1
YTM = 7.47%
1) After tax cost of debt = YTM*(1-tax rate) = 7.47*(1-0.4) = 4.48%
2) cost of equity = risk-free rate + beta * (market risk premium) = 6.5+0.7*6.25 = 10.86%
3)cost of preferred of equity = preferred equity dividend rate/current price = 7/60 = 11.67%
market value of debt = number of debt outstanding * market price of debt = 10000*1015 = 10150000
market value of equity = number of shares outstanding * market price of shares = 300000*40 = 12000000
market value of preferred equity=number of preferred equity outstanding * market price of preferred equity
= 43000*60 = 2580000
4) WACC = after tax cost of debt*MV of debt/(MV of debt+MV of equity + MV of preferred equity)+
cost of equity*MV of equity/(MV of debt+MV of equity + MV of preferred equity)+
cost of preferred equity/*MV of preferred equtiy/(MV of debt+MV of equity + MV of preferred equity)
=4.48*10150000/(10150000+12000000+2580000)+10.86*12000000/(10150000+12000000+2580000)+11.67*2580000/(10150000+12000000+2580000)
=8.33%
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