Question

answer all 5 please as this is in steps.

1. Fill in the Blanks

A corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 8 years to maturity, a $1,000 face value, and a $1,100 market price. MV of debt is

The company’s 100,000 shares of preferred stock pay a $3 annual dividend, and sell for $30 per share. Market value of preferred shares is

The company’s 500,000 shares of common stock sell for $25 per share and have a beta of 1.5. The market risk premium is 8% and risk free rate is 4%. Market value of equity is

Total Market Value =

Assuming a 40% tax rate, what is the company’s WACC?

2. A corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 8 years to maturity, a $1,000 face value, and a $1,100 market price. Identify the cost of debt.

3. The company’s 100,000 shares of preferred stock pay a $3 annual dividend, and sell for $30 per share. Identify the cost of preferred shares?

4. The company’s 500,000 shares of common stock sell for $25 per share and have a beta of 1.5. The risk free rate is 4%, and the market risk premium is 8%.

Identify the cost of equity.

5. Fill in the Blanks

Identify the weight of each. Weight of debt:

Weight of preferred:

Weight of common:

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=25*500000

=12500000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*10000*1.1

=11000000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=30*100000

=3000000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=12500000+11000000+3000000 =

=50700000

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 4 + 1.5 * (8)

Cost of equity% = 16

Cost of debt

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =8

1100 =∑ [(6*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^8

k=1

YTM = 4.484842213

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 4.484842213*(1-0.4)

= 2.6909053278

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 3/30*100

=10

Weight of equity = MV of Equity/MV of firm

Weight of equity = 12500000/50700000

W(E)=0.2465

Weight of debt = MV of Bond/MV of firm

Weight of debt = 35200000/50700000

W(D)=0.6943

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 3000000/50700000

W(PE)=0.0592

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=2.69*0.6943+16*0.2465+10*0.0592

WACC% = 6.4