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In: Finance

Spicer Reports Corp has 400,000 shares of common stock outstanding, 200,000 shares of preferred stock outstanding,...

Spicer Reports Corp has 400,000 shares of common stock outstanding, 200,000 shares of preferred stock outstanding, and 40,000 bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for common stock equity in the computation of Spicer's WACC?

A. 18.59% B. 19.49%
C. 24.37% D. 62.50% E. 79.75%

Comfort Chair, Inc. has a $1.5 million ($1000 face value) 10-year bond issue selling for 100.95% of par that pays an annual coupon of 6.75%. What is the firm’s before-tax component cost of debt? (Hint: rate)

A. 6.62%
B. 6.75%
C. 6.86%

D. 7.08%

E. 7.36%

Vast Vegas, Inc. stock has a beta of 1.42, the current risk-free rate is 3.85, and the expected return on the market is 10.5 percent. What is the cost of equity for the firm?

A. 13.29%
B. 14.30%

C. 14.85%

D. 15.15%

E. 17.12%

Expert Solution

Answer to Question 1:

Market Value of Common Stock = Number of shares * Price per share
Market Value of Common Stock = 400,000 * $25
Market Value of Common Stock = $10,000,000

Market Value of Preferred Stock = Number of shares * Price per share
Market Value of Preferred Stock = 200,000 * $12.50
Market Value of Preferred Stock = $2,500,000

Market Value of Debt = Number of Bonds * Market Price per Bond
Market Value of Debt = 40,000 * $970
Market Value of Debt = $38,800,000

Market Value of Firm = Market Value of Common Stock + Market Value of Preferred Stock + Market Value of Debt
Market Value of Firm = $10,000,000 + $2,500,000 + $38,800,000
Market Value of Firm = $51,300,000

Weight of Common Stock = Market Value of Common Stock / Market Value of Firm
Weight of Common Stock = $10,000,000 / $51,300,000
Weight of Common Stock = 0.1949 or 19.49%

Answer to Question 2:

Face Value = $1,000

Current Price = 100.95% * $1,000
Current Price = $1,009.50

Annual Coupon Rate = 6.75%
Annual Coupon = 6.75% * $1,000
Annual Coupon = $67.50

Time to Maturity = 10 years

Let Annual YTM be i%

$1,009.50 = $67.50* PVIFA(i%, 10) + $1,000 * PVIF(i%, 10)

Using financial calculator:
N = 10
PV = -1009.50
PMT = 67.50
FV = 1000

I = 6.62%

Annual YTM = 6.62%

Before-tax Cost of Debt = 6.62%

Answer to Question 3:

Cost of Equity = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Cost of Equity = 3.85% + 1.42 * (10.50% - 3.85%)
Cost of Equity = 3.85% + 1.42 * 6.65%
Cost of Equity = 13.29%

jeff jeffy answered 10 months ago

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