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Lo-Tek Industries, the nation’s largest manufacturer of hammers, has published the following information as of December...

  1. Lo-Tek Industries, the nation’s largest manufacturer of hammers, has published the following information as of December 31, 2019:
  1. Bank Loan: The company states that it currently has a newly issued $22 million bank loan at a rate of 4.5%.
  2. Bond: In addition, the firm has a 10-year, 11.0% coupon bond with a face value of $45 million and a yield to maturity of 6.0%.
  3. Preferred Stock: The company’s preferred stock sells for $100 per share and pays an annual dividend of $8 per share. There are 2 million shares outstanding.
  4. Common Equity: The company’s common stock sells for $60 per share and is expected to pay a dividend of $3.00 per share by the end of this year (i.e. Div1=$3.00). The dividend is expected to grow at a constant rate of 7% a year. The yield on risk-free Treasury Bills is 3.3% while the market (S&P500) return is believed to be 12.9%. Lo-Tek is a defensive stock with a Beta of 0.906. There are 9 million shares outstanding.
  5. The company’s tax rate is 21%.

plase answer all parts a-d to the question

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Answer:

By consideing all the parts in question for calculation of WACC:

Finance from bank loan= 22,000,000

Finance from debt = 45,000,000

Finance from preferred stock= 200,000,000

Finance from equity= 540,000,000 ( 60 × 9million shares)

Total finance = 807,000,000

Weight of bank loan = 22,000,000/807,000,000 = 0.0273

Weight of debt= 45,000,000/ 807,000,000= 0.0558

Weight of preferred stock= 200,000,000/807,000,000 = 0.2478

Weight of equity = 540,000,000 / 807,000,000 = 0.6691

Cost of bank loan= interest (1-tax)

= 4.5% (1-0.21)

= 4.5% (0.79)

= 3.56%

Cost of debt= ytm (1-tax rate)

= 6% (1-0.21)

= 6% (0.79)

= 4.74%

Cost of preferred stock= annual dividend/market value

= 8 / 100

= 0.08 or 8%

Cost of equity

= risk free rate + beta ( market return - risk free rate)

= 3.3% + 0.906 (12.9% - 3.3%)

= 3.3% + 0.906 (9.6%)

= 3.3% + 8.6976%

= 12%

WACC= weight of loan × cost of loan + weight of debt × cost of debt + weight of preferred stock × cost of preferred stock + weight of equity × cost of equity

= 0.0273 × 3.56% + 0.0558 × 4.74% + 0.2478 × 8% + 0.6691 × 12%

= 0.097% + 0.26% + 1.98% + 8.029%

= 10.37%

jeff jeffy answered 1 year ago
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