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LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding...

LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162.   It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at par but will incur flotation costs of $50 per bond (Hint: the coupon rate on the new bonds = the YTM on existing bonds). The firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,000 shares of preferred stock outstanding. Rollins' beta is 0.58, the risk-free rate is 3.33 percent, and the market risk premium is 6 percent.   The common stock currently sells for $100 a share and there are 5,000,000 shares outstanding. The firm's marginal tax rate is 40 percent.   What is the WACC?

Solutions

Expert Solution

a. Cost of Debt = 6.34%

b. Cost of preferred Stock = Dividend / Sell Price = $12 / 120 = 10.00%

c. Cost of Equity = Risk free + Beta * Risk Premium = 3.33% + 0.58 * 6% = 6.81%

d. WACC:

jeff jeffy answered 2 years ago
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