10,500 7 percent coupon bonds outstanding, with 25 years to maturity and a quote
ID: 2766292 • Letter: 1
Question
10,500 7 percent coupon bonds outstanding, with 25 years to maturity and a quoted price of 107.75. These bonds pay interest semiannually.
300,000 shares of common stock selling for $66.00 per share. The stock has a beta of 1.01 and will pay a dividend of $4.20 next year. The dividend is expected to grow by 5 percent per year indefinitely.
What is the firm's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
You are given the following information concerning Parrothead Enterprises:Explanation / Answer
Coupon 3.5, price 107.75, N 50, FV 100 , yield is 6.38%, post tax cost of debt is 6.38%*(0.65)= 4.14%
Cost of prefered stock is 4.5/95.5 = 4.71%
Cost of equity as per CAPMis Rf + beta*(Rm - Rf) = 5% + 1.01*(10.5% - 5%) = 10.56%.
Market value of debt is 10500*107.75=1,131,375
Market value of equity is 19,800,000
Market value of prefered stock is 907,250
Total market value is 21,838,625$
WACC = % Equity*cost of equity + % debt*cost of debt + % prefered stovk *cost of preferd stock
= (10.56% *0.9067) + (4.14% *0.0518) +( 4.71% *0.0415) = 9.57% + 0.21% + 0.19% = 9.97%
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