Question

Hankins Corporation has 9.3 million shares of common stock outstanding, 680,000 shares of 7.3 percent preferred stock outstanding, and 193,000 of 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.80 per share and has a beta of 1.38, the preferred stock currently sells for $106.20 per share, and the bonds have 14 years to maturity and sell for 87 percent of par. The market risk premium is 6.95 percent, T-bills are yielding 5.65 percent, and the firm’s tax rate is 40 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
  

Market value weight of debt
Market value weight of preferred stock
Market value weight of equity

b. If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Weighted average cost of capital             %

Answer 1

Cost of Equity = 5.65% + 1.38 * 6.95%

Cost of Equity = 15.2410%

Cost of Debt:

PMT = 8.5% * 1,000 * 0.5 = 42.5

PV = 870

FV = 1,000

N = 14 * 2 = 28

Using Financial Calculaor:

I = 5.135484%

Yearly Rate = 5.135484% * 2

Yearly Rate = 10.27%

Cost of Preferred Stock = 7.3/ 106.20

Cost of Preferred Stock = 6.87%

Value of Equity = 9.3 * 10⁶ * 65.80

Value of Equity = 611,940,000

Value of Preferred Equity = 680,000 * 106.20

Value of Preferred Equity = 72,216,000

Value of Debt = 193,000 * 870

Value of Debt = 167,910,000

Market value weight of debt = 167,910,000/ 852,066,000

Market value weight of debt = 19.71%

Market value weight of preferred Equity = 72,216,000/ 852,066,000

Market value weight of preferred Equity = 8.48%

Market value weight of Common Equity = 611,940,000/ 852,066,000

Market value weight of common Equity = 71.82%

Part B

WACC = 10.27% * (1 - 40%) * 19.71% + 6.87% * 8.48% + 15.2410% * 71.82%

WACC = 12.74%