Question

You are looking at the following information:

  

Debt:		6,000 5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 104 percent of par; the bonds make semiannual payments.
Common stock:		138,000 shares outstanding, selling for $65 per share; the beta is 1.18.
Preferred stock:		17,000 shares of 4 percent preferred stock (review my Ch.8 slide 43: what does "...% preferred stock" phrase mean?) outstanding, currently selling for $107 per share.
Market:		6 percent market risk premium and 3.5 percent risk-free rate.

  

The company is in the 33 percent tax rate bracket based on its corporate income.

  

Required:

  

Find the WACC. (Do not round your intermediate calculations.)

Multiple Choice

• 7.13%

• 7.03%

• 7.53%

• 7.23%

• 7.69%

Answer 1

Cost of debt

FV = 1,000

PV = -1,040

PMT = 1,000 * 0.05/2 = 25

N = 21 * 2 = 42

CPT I/Y

I/Y = 2.34914650%

Cost of debt, rd = 2.34914650% * 2

rd = 0.04698293

rd = 4.698293%

Market value of debt, D = 6000 * 1040

D = $6,240,000

Cost of preferred shares

Price = Preferred dividend/rp

rp = Preferred dividend/Price

rp = 4/107

rp = 0.03738317757

rp = 3.738317757%

Market value of preferred stocks, P = 17000 * 107

P = $1,819,000

Cost of equity

re = 0.035 + 1.18 * 0.06

re = 0.1058

re = 10.58%

Market value of equity, E = 138,000 * 65

E = $8,970,000

WACC