Question

You are given the following information for Twitter, Inc. Assume the company’s tax rate is 35%.
Debt:
40,000 7.5% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for $1050; the bonds make semiannual payments.
Common stock:
750,000 shares outstanding, selling for $56 per share; the beta is 0.85.
Preferred stock:
1,400,000 shares of 5% preferred stock, currently selling for $26 per share.
Market:
7% market risk premium and 3.5% risk-free rate.
Questions:
8. What is the company's after-tax cost of debt?
Answer: __________________________________________________________ (5 point)
9. What is the company's cost of common stock?
Answer: __________________________________________________________ (5 point)
10. What is the company's cost of preferred stock?
Answer: __________________________________________________________ (5 point)
11. What is the company's WACC?
Answer: __________________________________________________________ (10 point)

Please show working.

Input
Debt
Settlement date
Maturity date
Bonds outstanding
Annual coupon rate
Face value ($)
Coupons per year
Years to maturity
Bond price ($)
Common stock
Shares outstanding
Beta
Share price ($)
Preferred stock
Shares outstanding
Coupon rate
Share price ($)
Market
Market risk premium
Risk-free rate
Tax rate
Calculation & Output
Market value of debt
Market value of equity
Market value of preferred
Market value of firm
Market value capital structure
Weight of Debt
Weight of Common Stock
Weight of Preferred Stock
Question 8
Pretax cost of debt
Aftertax cost of debt
Question 9
Cost of common stock
Question 10
Cost of preferred stock
Question 11
WACC

Answer 1

1)

Coupon payment = 0.075 * 1000 = 75 / 2 = 37.5 ( since it is a semi annual bond, we divide by 2)

Par value = 1000

Number of periods = 20 * 2 = 40 ( since it is a semi annual bond, we multiply by 2)

price of bond = 1050

Pre tax cost using a financial calculator = 7%

keys to use in a financial calculator: PV = -1050, FV = 1000, N = 40, PMT = 37.5, CPT I/Y

After tax cost of debt = 0.07 ( 1 - 0.35)

After tax cost of debt = 0.0455 or 4.55%

2)

Cost of common stock using CAPM model = risk free rate + beta ( market risk premium)

Cost of common = 0.035 + 0.85 ( 0.07)

Cost of common = 0.0945 or 9.45%

3)

Cost of preferred stock = 7%

4)

Market value of debt = 40,000 * 1050 = 42,000,000

Market value of common equity = 750,000 * 56 = 42,000,000

Market value of preferred stock = 1,400,000 * 26 = 36,400,000

Total market value of capital structure = 42,000,000 + 42,000,000 + 36,400,000 = 120,400,000

weight of debt = 42,000,000 / 120,400,000 = 0.3489

weight of common stock = 42,000,000 / 120,400,000 = 0.3489

weight of preferred stock = 36,400,000 / 120,400,000 = 0.3023

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

WACC = 0.3489 * 0.0945 + 0.3489 * 0.0455 + 0.3023 * 0.07

WACC = 0.032971 + 0.015875 + 0.021161

WACC = 0.07 or 7%