Question

This is a multipart question, can you please show the work on how you did the problems.

1.Cost of Debt: 30 year Bonds Current Price 101.5% of par value 7.6 % Coupon Rate Semi Annual Bond 5 years to maturity Tax Rate: 40% What is the Cost of Debt? After Tax?

2.Preferred Stock: Dividend $7.50 Current Price $60.00 What is the Cost of Preferred?

3.Equity: Risk Free Rate 6.50% Market Risk Premium 6.25% Stock Beta 0.7 What is the Cost of Equity?

4.Market Value...Debt/Equity 10,000 Bonds Outstanding Selling @ 101.5% of Par Value 43,000 Preferred Stock @ $60.00 300,000 Shares of Common Stock @ $40.00 per share

5.What is the WACC?

6.Given the WACC calculation the NPV for the following capital budget investment $400,000

cash flows: 1st year -55,000, 2nd year 65,000, 3rd year 75,000, 4th year 85,000, 5th year 150,000 (Accept or Reject the project?)

7.NPV is ?

8.Calculate payback

Answer 1

1. Face value = 100

Coupon = 7.6%*100/2 = 3.8

Price = 101.5%*100 = 101.5

101.5 = 3.8/(1+YTM)^1+3.8/(1+YTM)^2+..................+3.8/(1+YTM)^9 + (100+3.8)/(1+YTM)^10

On solving, YTM = 7.24%

Cost of debt = 7.24%

After tax cost of debt = 7.24%*(1-40%) = 4.34%

2. Cost of preferredstock = 7.5/60 = 12.5%

3. COst of equity = risk free rate + Beta*Market Risk Premium = 6.5%+0.7*6.25% = 10.875%

4. Value of debt = 10000*101.5 = 1015000

Value of preferred stock = 43000*60 = 2580000

Value of common equity = 300000*40 = 12000000

Total = 1015000+2580000+12000000 = 15595000

5. WACC = cost of equity*Equity weightage+Aftertax cost of debt*Debt weightage+Cost of preferred stock*preferred weightag

=10.875%*(12000000/15595000)+4.34%*(1015000/15595000)+12.5%*(2580000/15595000) = 10.72%

6. NPV = -400000 - 55000/(1+10.72%) + 65000/(1+10.72%)^2 + 75000/(1+10.72%)^3 +85000/(1+10.72%)^4 + 150000/(1+10.72%)^5 = -194686

7. NPV is negative, so it should be rejected

8. Payback preiod = -400000 -55000 +65000 +75000+85000+150000 = -80000

Since the sum of the cashflows is negative, so payback period must be greater than 5