Question

Information

Use the following information about Fox Corp. for problems A-E.

Common stock: 5,000 shares outstanding, $50 per share. Fox will pay a dividend of $1.50 next year and this dividend is expected to grow at 5% per year.

Bonds: 1,000 bonds outstanding, with a 3% coupon paid semiannually, 5 years to maturity, and a price quote of 101.

Preferred Stock: 1,500 shares outstanding with annual dividends of $4.00, currently selling at $100.

Fox Corp.'s tax rate is 21%.

A) What is Fox Corp.'s Weight of Equity?

B) What is Fox Corp.'s After Tax Cost of Debt?

C) What is Fox Corp.'s Cost of Preferred Stock?

D) What is Fox Corp.'s Cost of Equity?

E) What is Fox Corp.'s WACC?

Answer 1

Market value of common stock = 5,000 * 50 = 250,000

Market value of bonds = 1000 * 101 = 101,000

Market value of preferred equity = 1,500 * 100 = 150,000

Total market value = 150,000 + 101,000 + 250,000 = 501,000

Weight of equity = 250,000 / 501,000

Fox Corp.'s Weight of Equity = 0.499

b)

Coupon payment = 0.03 * 100 = 3 / 2 = 1.5

Number of periods = 5 * 2 = 10

Face value = 100

price = 101

Before tax cost of debt using a financial calculator = 2.784%

Keys to use in a financial calculator: 2nd I/Y 2. PV -101, FV 100, PMT 1.5, N 10, CPT I/Y

After tax cost of debt = 0.02784 ( 1 - 0.21)

Fox Corp.'s After Tax Cost of Debt = 0.021994 or 2.1994%

c)

Cost of preferred equity = annual dividend / preferred share price

Cost of preferred equity = 4 / 100

Fox Corp.'s Cost of Preferred Stock = 0.04 or 4%

d)

Cost of equity using dividend discount model = (D1 / share price) + growth rate

Cost of equity = ( 1.5 / 50 ) + 0.05

Fox Corp.'s Cost of Equity = 0.08 or 8%

e)

Weight of bonds = 101,000 / 501,000 = 0.2016

Weight of preferred stock = 150,000 / 501,000 = 0.2994

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

WACC = 0.2016 * 0.021994 + 0.499 * 0.08 + 0.2994 * 0.04

WACC = 0.004434 + 0.03992 + 0.011976

Fox Corp.'s WACC = 0.05633 or 5.633%