Your company is paying 3.22% on their bonds outstanding, 3.22% on their preferre

Question

Your company is paying 3.22% on their bonds outstanding, 3.22% on their preferred stock, and stock holders requiring 7.61%. Your effective tax rate is 0.42. Of your capital structure, $340.30m of assets are funded by debt, $119.74m is preferred, and $170.15m is in common stock. What is your WACC? 8. Harper is considering buying a Parker Sled Manufacturing bond for $215.93. This bond has a maturity value of $218, maturing in 1 years, with comparable interest rates of 24%, and coupon payments of $37. What should she pay? 9. You are evaluating a project that will cost $1924.53 at inception, and pays $652 in 1 year, $60 in 2 years, and $664 in 3 years If your required return is 30%, what is the NPV?

Explanation / Answer

All Amounts in $ 7. WACC for Company (Amounts in millions of $) Capital Portion Amount Rate Post Tax Weighted $ of Capital Rate Cost of Capital Bonds 340.3 3.22% 1.87% 6.36 Preferred Stock 119.74 3.22% 3.22% 3.86 Common Stock 170.15 7.61% 7.61% 12.95 Total 630.19 23.16 Hence, the WACC for the Company is 3.68% 8. Coupon Rate of the Bond = $ 37 / $ 200 (Face Value assumed) = 18.5% With this information, the price which should be paid for the bond by Harper is $ 191.129 or $ 191.13. 9. Based on the information given, the Net Present Value or NPV of the project works out to -$ 834.81

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