Question

You are provided with the following information for Kameo Corp.:

Bonds: The firm has $10,000,000 in 5% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 102% of the par; the bonds make semi-annual payments.

Preferred Shares: 25,000 shares of $50 par 9% preferred stock outstanding, currently selling for $65 per share.

Common Shares: 400,000 shares outstanding, selling for $50 per share. Kameo expects to pay a dividend of $2.34 per share and the expected growth rate is 4% per year.

The company’s tax rate is 35%.

What are the market value weights for Kameo Corp.?

What is the cost of debt for Kameo Corp?

What is the cost of preferred stock for Kameo Corp?

What is the cost of equity for Kameo Corp?

What is the Weighted Average Cost of Capital (WACC) for Kameo Corp?

Please show all of your work.

Answer 1

Market Value weights:

Particulars	Price	Quantity	Price x Quantity	Weight
Debt	1020.00	10000	10,200,000.00	0.3205
Preferred Share	65.00	25000	1,625,000.00	0.0511
Equity	50.00	400000.0	20,000,000.00	0.6284
		Total	31,825,000.00

Cost of debt:

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	$1,000.00
PV = Present Value =	-$1,020.00
N = Total number of periods = Years x frequency = 20*2 =	40
PMT = Payment = Coupon / frequency =	$25.00
CPT > I/Y = Rate or YTM Semiannual =	2.4214
Convert Yield in annual and percentage form = Yield / 100*2 =	4.8428%

Yield = Cost of debt before tax = 4.8428%

.

Cost of preferred:

Cost of preferred = Face Value x Rate of dividend / Market value

Cost of Preferred = 50 x 9% / 65

Cost of Preferred = 6.9231%

.

Cost of equity:

Cost of equity = (Expected dividend / Stock price) + Growth rate

Cost of equity = (2.34/50)+4%

Cost of equity = 8.6800%

WACC = Cost of equity x Weight of equity + Cost of preferred x Weight of preferred + Cost of debt of before tax debt x Weight of debt x (1-Tax rate)

WACC = Cost of equity x Weight of equity + Cost of preferred x Weight of preferred + Cost of debt of before tax debt x Weight of debt x (1-Tax rate)

WACC = 8.68% x 0.6284 + 6.9231% x 0.0511 + 4.8428% x 0.3205 x (1-35%)

WACC = 6.8172%