Question

The MS Pony Entertainment Company is trying to determine its weighted average cost of capital for use in making several investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carry an 8% coupon rate paid/compounded annually and are currently selling for $962.50. The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Investment dealers have stated that floatation costs for new preferred will be 50 cents per share. The firm has significant retained earnings but will also need to sell new common stock to finance the projects it is now considering. MS is expected to pay a $2.50 per share dividend next year and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share. Calculate the costs of the various components of MS. The firm's tax rate is 44%

Answer 1

	Frequency in a year	1
	Coupon rate	8.00%
	Face value	$       1,000
	Coupon payment	$       80.00	=1000*8%/1
		8.00%						9.00%
Year	Cash Flow	PV factor = 1/ (1+r)^t	PV					PV factor = 1/ (1+r)^t	PV
0	$                  (962.50)	1.000	$   (962.50)					1.000	$   (962.50)
1	$                      80.00	0.926	$       74.07					0.917	$       73.39
2	$                      80.00	0.857	$       68.59					0.842	$       67.33
3	$                      80.00	0.794	$       63.51					0.772	$       61.77
4	$                      80.00	0.735	$       58.80					0.708	$       56.67
5	$                      80.00	0.681	$       54.45					0.650	$       51.99
6	$                      80.00	0.630	$       50.41					0.596	$       47.70
7	$                      80.00	0.583	$       46.68					0.547	$       43.76
8	$                      80.00	0.540	$       43.22					0.502	$       40.15
9	$                      80.00	0.500	$       40.02					0.460	$       36.83
10	$                      80.00	0.463	$       37.06					0.422	$       33.79
11	$                      80.00	0.429	$       34.31					0.388	$       31.00
12	$                      80.00	0.397	$       31.77					0.356	$       28.44
13	$                      80.00	0.368	$       29.42					0.326	$       26.09
14	$                      80.00	0.340	$       27.24					0.299	$       23.94
14	$                 1,000.00	0.340	$     340.46					0.299	$     299.25
		Total	$       37.50					Total	$     (40.36)
NPV @ 0.08	37.50
NPV @ 0.09	(40.36)
Difference in both	77.86
YTM	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
	'=8%+ (9%-8%)*(37.499/(37.499+40.361)
YTM	8.48%
Annual YTM=	8.48%
Tax rate	44.00%
After-tax cost	=8.48%*( 1-44%)
After-tax cost	4.75%
Cost of preferred stock
Preferred dividend	$                        4.60
Market price per share (42.50-0.50)	$                      42.00			jeff jeffy Next > < Previous Related Solutions As CFO of ACL you are trying to determine the firm's weighted average cost of capital... As CFO of ACL you are trying to determine the firm's weighted average cost of capital (WACC). You have gathered the following information: The firm has 1,500 $1,100 face value bonds trading at par. The yield to maturity is 7.28%. The firm has 40,000 preferred shares trading at $50 per share and has a dividend yield of 5.14%. The book value of the preferred shares is $1,600,000. The firmhas 75,000 common shares of stock trading at $60 per share. The... Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company... Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company should earn at least its weighted average cost of capital in new investments. What are the financial implications if it does not? 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