letters a-f with work please 2. [19 points] Burton currently has $850,000 of lon
ID: 2798689 • Letter: L
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letters a-f with work please
2. [19 points] Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with a market price of $13, and 20,000 shares of common stock ($20 par) with a market price of $54 per share. They have used a WACC of 14% in the past to evaluate projects but want to determine their current required return for new investments. Debt: Burton can sell a 10-year, $1,000 par value, 8 percent annual coupon bond for $980.A flotation cost of 2 percent of the face (par) value would be required. Additionally, the firm has a marginal tax rate of 34 percent. Preferred Stock: Burton pays $1.25 dividends annually on their preferred shares. The shares are currently selling for $13 in the secondary market. They do not have plans to issue any additional preferred stock. Common Stock: Burton's common stock is currently selling for $54 per share. The dividend expected to be paid at the end of the coming year is $4. Its dividend payments have been growing at a constant 3% rate. a. b. C. d. e, f. Calculate the after-tax cost of debt Calculate the cost of preferred equity Calculate the cost of common equity Calculate the WACC Re-calculate the NPV for the project in #1 above using this new WACC. Should Burton accept the project when considering this revised cost of capital?Explanation / Answer
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a) cost of debt after tax Kd= 980-2%*1000=80*(PVIF,r%,10)+1000*(PVIF,r%,10) 960=80*(PVIF,r%,10)+1000*(PVIF,r%,10) By solving this kd= 0.08613 Cost of Debt after tax=8.6127*(1-.34) 5.6844% Year Outflow Disc Fact PV 1 80 0.92070 73.66 2 80 0.84769 67.82 3 80 0.78047 62.44 4 80 0.71858 57.49 5 80 0.66160 52.93 6 80 0.60914 48.73 7 80 0.56084 44.87 8 80 0.51636 41.31 9 80 0.47542 38.03 10 1080 0.43772 472.73 960.00 b) cost of preferred stock Kp=D/P0=1.25/13 0.09615 or 9.6154% C) cost of equity=D1/P0+g=4/54+.03 0.10407 or 10.4074% d) calculation of WACC Value Weight K (Weight*K) Market value of debt=850*960 816,000 0.416114 5.6844% 2.36535% Market Value of Preference share 13*5000 65,000 0.033146 9.6154% 0.31871% Market value of equity =20000*54 1,080,000 0.550739 10.4074% 5.73177% Total 1,961,000 WACC 8.41584%Related Questions
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