You are given the following information concerning Parrothead Enterprises: Debt:

Question

You are given the following information concerning Parrothead Enterprises:

Debt: 9,100 6.3 percent coupon bonds outstanding, with 24 years to maturity and a quoted price of 104.25. These bonds pay interest semiannually.

Common stock: 230,000 shares of common stock selling for $64.60 per share. The stock has a beta of .86 and will pay a dividend of $2.80 next year. The dividend is expected to grow by 5.1 percent per year indefinitely.

Preferred stock: 8,100 shares of 4.55 percent preferred stock selling at $94.10 per share.

Market: An expected return of 11.9 percent, a risk-free rate of 5.05 percent, and a 34 percent tax rate.

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.)

Explanation / Answer

We need to calculate YTM for the bond, which is= 6%

Market value of debt= 104.25* 9100= 948675$

Cost of equity= d1/po+ g= 2.8/64.60+ 0.051= 0.0943 or 9.43%

Market value of equity= 14858000$

Cost of preferred stock = 4.55/94.10= 4.84%

Market value of preferred stock = 762210$

Total market capitalization= 16568885$

WACC= 6%(1-0.34)*0.05725 + 4.84* 0.0460+ 9.43*0.896=

0.2267+ 0.22264+8.449= 8.89%

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