The Saunders Investment Bank has the following financing outstanding. 40,000 bon
ID: 2796383 • Letter: T
Question
The Saunders Investment Bank has the following financing outstanding.
40,000 bonds with a coupon rate of 8 percent and a current price quote of 112.0; the bonds have 20 years to maturity. 210,000 zero coupon bonds with a price quote of 18.5 and 30 years until maturity.
130,000 shares of 6 percent preferred stock with a current price of $81, and a par value of $100.
2,400,000 shares of common stock; the current price is $67, and the beta of the stock is 1.25.
The corporate tax rate is 30 percent, the market risk premium is 5 percent, and the risk-free rate is 2 percent.
The Saunders Investment Bank has the following financing outstanding.
Explanation / Answer
The Cost (yield to matruity) of the coupon bonds (rb) = rate(nper,pmt,pv,fv) in excel =rate( 20*2,8/2,-112,100) * 2 = 6.886%
The Cost (yield to matruity) of zero coupon bonds(rz): 18.5 = 100/(1+r)^30 ; r = 5.786%
The Cost of preferred stock (rp) = preferred dividend/ Price = 6/81 = 7.407%
The Cost of Common stock(re) = rf + beta * market risk premium = 2 +1.25*5 = 8.25%
Total value of coupon bonds = 40,000 *112 = 4,480,000
Total Value of Zero bonds = 210,000 *18.5 = 3,885,000
Total Value preferred stock = 130,000 *81 = 10,530,000
Total value of common stock = 2,400,000 * 67 = 160,800,000
Total = 179,695,000
Weight of coupon bonds(wb) = 4480000/179695000 = 0.02493
Weight of zero bonds (wz) = 3885000/179695000 = 0.02162
Weight of preferred stock (wp) = 10530000/179695000 = 0.05860
Weight of Commonstock (we) = 1-0.02493-0.02162-0.05860 = 0.89485
WACC =Wb*rb*(1-tax) + Wz*rz*(1-tax) + wp*rp + we* re = 0.02493*6.886*(1-0.3) + 0.02162*5.786%*(1-0.3) + 0.05860 *7.407 + 0.89485 *8.25 = 8.024%
WACC = 8.02%
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