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Hankins Corporation has 5.5 million shares of common stock outstanding, 302,000 shares of 4.2 percent preferred...

Hankins Corporation has 5.5 million shares of common stock outstanding, 302,000 shares of 4.2 percent preferred stock outstanding, par value of $100, and 155,000 5.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $72.90 per share and has a beta of 1.11, the preferred stock currently sells for $104.20 per share, and the bonds have 20 years to maturity and sell for 103.6 percent of par. The market risk premium is 6.7 percent, T-bills are yielding 3.3 percent, and the firm’s tax rate is 21 percent.

What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

market value weight of debt:

market value weight of preferred stock:

market value of equity:

What is the firm's cost of each form of financing? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

aftertax cost of debt : %

cost of preferred stock: %

cost of equity: %

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: %

Solutions

Expert Solution

WACC = (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common stock * cost of common stock)

market value of debt = bonds outstanding * market price per bond

market value of preferred stock = shares outstanding * market price per share

market value of common stock = shares outstanding * market price per share

weight of debt = market value of debt / total market value

weight of preferred stock = market value of preferred stock / total market value

weight of common stock = market value of common stock / total market value

after-tax cost of debt = YTM of bond * (1 - tax rate)

YTM is calculated using RATE function in Excel with these inputs :

nper = 20*2 (20 years to maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 5.5% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -1000 * 103.6 / 100 (current bond price = face value * 103.6 / 100. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1000 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE calculated is the semiannual YTM. To calculate the annual YTM, we multiply by 2.

after-tax cost of debt = YTM * (1 - tax rate)

after-tax cost of debt ==> 4.11%

cost of preferred stock = annual dividend / current price

annual dividend = par value * dividend rate

cost of equity = risk free rate + (beta * market risk premium)

WACC ==> 8.59%

jeff jeffy answered 1 year ago

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