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Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock that...

Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock that pays an annual dividend of $8, and 200,000 bonds with a 10 percent coupon (semiannual interest) and 20 years to maturity. At present, the common stock is selling for $50 per share, the bonds are selling for $950.62 per $1,000 of face value, and the preferred stock is selling at $74 per share.

The estimated required rate of return on the market is 13 percent, the risk-free rate is 8 percent, and Bluefield's beta is 1.4. Bluefield's tax rate is 30 percent. Estimate the cost of each source of financing, the weights to apply to each source, and the WACC.

1. rd= wd=

2. rp= wp=

3. rs= ws=

4.WACC=

Solutions

Expert Solution

Ke = Rf + beta ( Rm - Rf)

= 8% + 1.40 ( 13% - 8%)

= 8% + 1.4 (5%)

= 8% + 7%

= 15%

Kp = pref Div / Pref stock price

= $ 8 / $ 74

= 0.1081 i.e 10.81%

Kd = YTM

YTM is the rate at which PV of Cash inflows are equal Bond price

YTM = raate at which least +ve NPV + [ NPV at that rate / Change in NPV due to inc in rate by 0.5% ] * 0.5%

= 5% + [ 49.38 / 80.23 ] * 0.5%

= 5% + 0.31%

= 5.31% per six months

YTM per anum = 5.31% * 12/6

= 10.62%

Kd after Tax = Kd (1-T)

= 10.62% * ( 1 - 0.3)

= 10.62% * 0.7

= 7.43%

WACC = [ We * Ke ] + [ Wp * Kp ] + [ Wd * (Kd (1- T)) ]

WACC:

jeff jeffy answered 1 year ago

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