Question

When creating your initial post, assume you are the CFO of Hankins Corporation.   Given the key financial data below, perform a detailed and thorough financial analysis (show and explain all calculations) that includes the following:

1. Describe the firm's market value capital structure:  
   1. What is the market value for each type of financing used by the firm: equity, preferred stock, and debt?
   2. What is the total market value for Hankins Corporation?  
   3. What are the respective market value weights for each component of the firm's financing (equity, preferred stock, and debt)?
2. If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? Hint: the firm's WACC is the appropriate discount rate. Compute Hankins' WACC:  
   1. What is the cost of equity using CAPM?
   2. If the YTM of the bonds is 5.93%, and YTM represents the cost of debt, what is the after-tax cost of this debt?  
   3. What is the cost of the firm's preferred stock?
   4. Based on this information, what is the WACC for Hankins Corporation?

Key financial data for Hankins Corporation:

• Common stock outstanding = 5.4 million shares; market value = $64/share; beta = 1.13
• 5.6% Preferred stock outstanding = 290,000 shares at $103/share
• 6.7% semi-annual bonds outstanding = $125,000; par value = $1,000 each; market value is 109% of par; all bonds mature in 20 years.
• Market risk premium = 6.8%
• T-bills current yield = 4.3%
• Corporate tax rate = 34%

Answer 1

market value of equity = price per share * shares outstanding = $64 * 5,400,000 = $345,600,000

market value of debt = price per bond * bonds outstanding = ($1000 * 109%) * 125,000 = $136,250,000

market value of preferred stock = price per share * shares outstanding = $103 * 290,000 = $29,870,000

total market value = $345,600,000 + $136,250,000 + $29,870,000 = $511,720,000

Weight of equity = market value of equity / total market value = $345,600,000 / $511,720,000 = 0.675

Weight of debt = market value of debt / total market value = $136,250,000 / $511,720,000 = 0.266

Weight of preferred stock  = market value of preferred stock / total market value = $29,870,000 / $511,720,000 = 0.058

cost of equity = risk free rate + (beta * market risk premium)

cost of equity = 4.3% + (1.13 * 6.8%) = 11.98%

cost of debt = YTM * (1 - tax rate) = 5.93% * (1 - 34%) = 3.91%

cost of preferred stock = dividend / price

dividend = face value * dividend rate = $100 * 5.6% = $5.6

cost of preferred stock = $5.6 / $103 = 5.44%

WACC = (weight of equity * cost of equity) + (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock)

WACC = (0.675 * 11.98%) + (0.266 * 3.91%) + (0.058 * 5.44%) = 9.45%