Question

Answer in excel please

LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162.   It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at par but will incur flotation costs of $50 per bond (Hint: the coupon rate on the new bonds = the YTM on existing bonds). The firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,000 shares of preferred stock outstanding. Rollins' beta is 1.94, the risk-free rate is 3.50 percent, and the market risk premium is 6 percent.   The common stock currently sells for $100 a share and there are 5,000,000 shares outstanding. The firm's marginal tax rate is 40 percent.   What is the WACC?

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=100*5000000

=500000000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*100000*1.162

=116200000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=120*1000000

=120000000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=500000000+116200000+120000000

=736200000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 500000000/736200000

W(E)=0.6792

Weight of debt = MV of Bond/MV of firm

Weight of debt = 116200000/736200000

W(D)=0.1578

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 120000000/736200000

W(PE)=0.163

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 3.5 + 1.94 * (6)

Cost of equity% = 15.14

Cost of debt

K = Nx2

Bond Price -flotation cost =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

1162-50 =∑ [(12*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2

k=1

YTM = 10.6371449019

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 10.6371449019*(1-0.4)

= 6.38228694114

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 12/(120)*100

=10

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=6.38*0.1578+15.14*0.6792+10*0.163

WACC =12.92%