Question

In December of 1903, Wilbur and Orville Wright made history with their bi-plane contraption that managed to do the seemingly impossible: it gave man the ability to fly. The concept was so unearthly, in fact, that private aviation first took off not as a means of transportation, but as a sideshow of sorts. In those pioneer days, seeing a man use technology to overcome gravity was such a novelty that early aviators made their living mostly through exhibition flights.

Seven years after the Wright Brothers proved flight was possible, a car salesman by the name of Clyde Cessna found himself awestruck by one such exhibition in Oklahoma. He’d heard tales of men taking to the skies in these machines (and making thousands of dollars in the process), and now that he’d seen one in person he was certain: Clyde Cessna was going to build an airplane of his own.

The Cessna Aviation Company was an American general aviation aircraft manufacturing corporation headquartered in Wichita, Kansas. Cessna produced small, piston-powered aircraft, as well as business jets. For many years the company was one of the highest-volume producers of general aviation aircraft in the world. The company was founded in 1927.

The following information is available concerning a firm's capital:

Debt: 500,000 bonds with a face value of $1000 and an initial 20-year term were issued five years ago with a coupon rate of 8%. Today these bonds are selling for $846.30.

Preferred stock: 200,000 shares of preferred stock paying an annual dividend of $9.50 are outstanding. The shares currently trade at $79.16.

Common equity: Two hundred thousand shares of common stock are outstanding which are now selling for $22.50 per share. An annual dividend of $1.70 was just paid and is expected to grow indefinitely at 6%.

The combined federal and state tax rate is 40%.

Required:

Calculate the firm's WACC.

Answer 1