ABC, Inc. is looking at raising additional capital for a future project. For ABC
ID: 2807206 • Letter: A
Question
ABC, Inc. is looking at raising additional capital for a future project. For ABC, Inc. to determine whether this project is worth investing in, it must first determine the cost of the capital it will use to finance the project.
A. The firm’s current stock price is $50 and it has 3 million shares of stock outstanding. The firm also has $35 million of preferred stock and $60 million of debt. Calculate the weights of each capital component.
B. The firm is looking at issuing a new 30-year bond that pays a semi-annual coupon of 8%. The bond is expected to sell at $870. The firm’s tax rate is 35%. Calculate the After-Tax rd.
C. The firm just paid out a dividend of $3.50 on common stock with an expected growth rate of 3%. Calculate the re.
D. The firm expects its preferred stocks to sell for $120.00. The firm pays a $6 annual dividend on its preferred stock. Calculate the rps.
E. What is the firm’s WACC?
Explanation / Answer
A Current stock price 50 No of shares 3.00 Millions Total common stock 150.00 Millions Prefered stock 35.00 Millions Debt 60.00 Millions Weight of common stock 0.61 150/(150+35+60) Weight of prefered stock 0.14 35/(150+35+60) Weight of debt 0.24 60/(150+35+60) B Time to maturity 30.00 years Coupon 8% Price 870.00 Face value 1,000.00 tax rate 35% Yield to maturity 9.29% Using yield function and all the above mentioned details After tax cost of debt 6.04% Yield*(1-tax rate) C Dividend 3.50 Growth rate 3% Stock price 50 Return on equity 10.21% using the formula Dividend*(1+growth rate)/Stock price + Growth rate D Prefered stock price 120 Dividend on prefered stock 6 Return on prefered stock 5% E WACC 8.44% (weight of common stock * return on equity + weight on prefered stock* return on prefered stock+weight of debt * after tax cost of debt
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