In: Finance
Debt:
Face Value of Debt = $450,000
Market Value of Debt = 102% * $450,000
Market Value of Debt = $459,000
Pre-tax Cost of Debt = 8.49%
After-tax Cost of Debt = 8.49% * (1 - 0.30)
After-tax Cost of Debt = 5.943%
Preferred Stock:
Number of shares outstanding = 5,000
Current Price = $58
Annual Dividend = 7.00% * $100
Annual Dividend = $7
Market Value of Preferred Stock = 5,000 * $58
Market Value of Preferred Stock = $290,000
Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = $7 / $58
Cost of Preferred Stock = 12.069%
Common Stock:
Number of shares outstanding = 35,000
Current Price = $47
Market Value of Common Stock = 35,000 * $47
Market Value of Common Stock = $1,645,000
Cost of Common Stock = 13.50%
Answer a.
Market Value of Firm = Market Value of Debt + Market Value of
Preferred Stock + Market Value of Common Stock
Market Value of Firm = $459,000 + $290,000 + $1,645,000
Market Value of Firm = $2,394,000
Answer b.
Weight of Debt = $459,000 / $2,394,000
Weight of Debt = 0.192
Weight of Preferred Stock = $290,000 / $2,394,000
Weight of Preferred Stock = 0.121
Weight of Common Stock = $1,645,000 / $2,394,000
Weight of Common Stock = 0.687
Answer c.
WACC = Weight of Debt * After-tax Cost of Debt + Weight of
Preferred Stock * Cost of Preferred Stock + Weight of Common Stock
* Cost of Common Stock
WACC = 0.192 * 5.943% + 0.121 * 12.069% + 0.687 * 13.500%
WACC = 11.88%