Question

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1) A compant has 50,000 shares of common stock outstanding at a market price of $20...

1) A compant has 50,000 shares of common stock outstanding at a market price of $20 a share. The common stock just paid a $1 annual dividend and has a divided growth rate of 5 percent. What is the total market value of common stock? What is the cost of equity (common stock)?

2) There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share. What is the total market value of preferred stock? What is the cost of preffered stock?

3) The outstanding bonds mature in 15 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,050 each. The bonds pay 8 percent interest, semiannually. What is the total bond market value? What is the cost of debt?

4) Use the results from questions 1-3 to compute the weight of equity (common stock), the weight of preferred stock, and the weight of debt.

5) The tax rate is 15 percent. Computer WACC?

Solutions

Expert Solution

1. Total market value of common stock = No. of outstanding shares * Market value per share = 50,000 * $20

= $1,000,000

Cost of equity (common stock) = (Expected dividend next year / Current market value of common stock) + Expected growth rate of dividends

= (1.05 / 20) + 5%

=10.25%

2. Total market value of preferred stock = No. of outstanding shares * Market value per share = 12,000 * $51

= $612,000

Cost of preferred stock (assuming face value of preferred stock as $100)

= (Annual dividends / Current market value of preferred stock) = 6 / 51

=11.77%

3. Total bond market value = No. of outstanding bonds * Market value per bond = 750 * $1,050

= $787,500

Cost of debt (using current yeild method) = (Coupon rate * Face value) / Current market price

= (8% * 1000) / 1050

= 7.6%

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

= 7.6% * 0.85 = 6.46%

4. Calculating the weight of common stock(Wcs), preferred stock (Wps) and bonds (Wb) based on the current market values of each.

Total capital = current market value of common stock + current market value preferred stock + current market value of bonds

= $1,000,000 + $612,000 + $787,500

=$2,399,500

Therefore, Wcs = total market value of common stock / total market value of all the capital

= 1,000,000 / 2,399,500 = 0.417

Wps = total market value of preferred stock / total market value of all the capital

= 612,000 / 2,399,500 = 0.255

Wb = total market value of bond / total market value of all the capital

= 787,500 / 2,399,500 = 0.328

5. Calculating WACC

WACC = (Weight of common stock)(cost of common stock) + (Weight of preferred stock)(cost of preferred stock) + (Weight of bond)(cost of bond)

=(0.417)(10.25) + (0.255)(11.77) + (0.328)(6.46)

=4.27 + 3.00 + 2.12

= 9.39%

jeff jeffy answered 1 year ago

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