You are given the following information concerning Parrothead Enterprises: Calcu

Question

You are given the following information concerning Parrothead Enterprises:

  
Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Debt: 9,900 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 106.25. These bonds pay interest semiannually. Common stock: 270,000 shares of common stock selling for $65.40 per share. The stock has a beta of .94 and will pay a dividend of $3.60 next year. The dividend is expected to grow by 5.4 percent per year indefinitely. Preferred stock: 8,900 shares of 4.7 percent preferred stock selling at $94.90 per share. Market: An expected return of 11.1 percent, a risk-free rate of 5.2 percent, and a 40 percent tax rate.

Explanation / Answer

cost of equity using CAPM = 5.2% + 0.94*(11.1 - 5.2)% = 10.746%

cost of equity using DDM = 3.6/65.4 + 5.4% = 10.9046%

cost of equity (average ) = (10.9046 + 10.746)%/2 = 10.8253%

WACC = 8.22%

Amount weight cost weight*cost equity 17658000 0.6084 10.83% 0.0659 debt 10518750 0.3624 4.10% 0.0149 preferred share 844610 0.0291 4.95% 0.00

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