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.

Input
Debt
Settlement date	01/01/00
Maturity date	01/01/20
Bonds outstanding	40,000
Annual coupon rate	7.5%
Face value ($)	1,000
Coupons per year	2
Years to maturity	20
Bond price ($)	1,050
Common stock
Shares outstanding	750,000
Beta	0.85
Share price ($)	56
Preferred stock
Shares outstanding	1,400,000
Coupon rate	5.0%
Share price ($)	26
Market
Market risk premium	7.0%
Risk-free rate	3.5%
Tax rate	35.0%
Calculation & Output
Market value of debt	42,000,000
Market value of equity	42,000,000
Market value of preferred	36,400,000
Market value of firm	120,400,000
Market value capital structure
Weight of Debt	0.3488
Weight of Common Stock	0.3488
Weight of Preferred Stock	0.3023
Please show working?
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

Cost of debt for Bond

Par value of Bond = 1000, Market Value = 1050, Coupon = 7.5%(paid semiannually), Time = 20 Years
Coupon C_t = Face value * Coupon rate /2 = 1000 * 7.5%/2 = 37.5
Price of Bond = C_t/(1+YTM/2)^t + Face Value /(1 +YTM/2)^2t
1050 = C_t/(1+YTM/2)^t + Face Value /(1 +YTM/2)^2t  
1050 = 37.5/(1+YTM/2)^t + 1000/(1 +YTM/2)^2t
Before tax cost of debt = YTM = 7.0306%
After tax cost of debt = Ytm * (1 -tax rate ) = 7.0306% * ( 1-35%)= 4.5698%

Cost of equity
Using CAPM cost of equity = Risk free rate + Beta * ( Market risk premium = 3.5% + 0.85 * 7.% = 9.45%

Cost of Preferred Stock = 5% ( Since par value of preferred stock not given hence 5% taken)
However if par value is given the cost = 5% * Par value / current price

WACC = Weight of Debt * After Tax cost of Debt + Weight of equity * Cost of Equity + weight of Preferred stock * Cost of preferred stock = 0.3488 * 4.5698% + 0.3488 * 9.45% + 0.3023 * 5% = 0.06401

The answer will change if par value of preferred stock is given .

Best of Luck . God Bless