Question

1. Using the following information to calculate the firm’s WACC.
   • The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock.
   • Debt: 7,000 5.0% coupon bonds outstanding, with 11 years to maturity, $1,000 par value and a quoted price of 106.25% of par value. These bonds pay interest semiannually.
   • Common Stock: 300,000 shares of common stock selling for $65.40 per share. The stock has a beta of 1.44.
   • Preferred Stock: 8,500 shares of preferred stock selling at $96.00 per share and pay annual dividends of $5.70.
   • Market: An 8.6 percent expected return, a 2.6 percent risk-free rate, and a 25 percent tax rate.

Answer 1

cost of debt:

Using financial calculator

N=11*2

PMT=5%*1000/2

PV=-106.25%*1000

FV=1000

CPT I/Y=2.14080%

YTM=2.14080%*2=4.28160%

cost of preferred stock=Preferred dividend/preferred share price=5.70/96=5.9375%

cost of common stock=risk free rate+beta*(market return-risk free rate)=2.6%+1.44*(8.6%-2.6%)=11.2400%

WACC=proportion of debt*cost of debt*(1-tax rate)+proportion of preferred stock*cost of preferred stock+proportion of common stock*cost of common stock=30%*4.28160%
*(1-25%)+10%*5.9375%+60%*11.2400%=8.30111%