Question

In: Finance

American Steel has issued $50 million in long-term bonds, with a face value of $1,000 paying...

American Steel has issued $50 million in long-term bonds, with a face value of $1,000 paying a 9% coupon. The bonds are now trading at a 15% premium to their face value providing a yield-to-maturity of 7%. The firm also has 1.5 million shares of common stock that were issued at $43/share at the company’s IPO and are currently trading at $56/share. American Steel is a mature firm that paid a $7 dividend last year, and dividends are expected to grow at 2% indefinitely. American Steel also has 500,000 preferred shares issued that are trading at $10/share with a dividend of $1. Treasury bills are currently yielding 5%, the firm has a Beta of 1.1, and its tax rate is 35%. Please show your answer to one decimal place.

i) What is the value of the firm?

ii)What is the market value of the firm’s debt and equity (common/pref)?

iii) What is the firm’s weighted average cost of capital?

Expert Solution

Given

Face value =$1000

Premium value =$1000 + 15% of 1000= $1150

Coupon rete = 9%

Yield to maturity or Cost of Debt =7%

Market value of Equity = No.of shares * Currently trading price = 1.5million *56= $84 million.

Market value of preferred shares= 500,000 * 10= $500,0000.

Market value of debt =$50 million * 1150= $57500 million

Treasury bills or Risk Free rate= 5%

Beta= 1.1

Tax rate= 35%

A) Value of firm or Enterprise Value(EV)= Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalents

EV= $84million + $500,0000 + $50million +57500 million-0 = $57369,000,000.

B) Market value of Equity = No.of shares * Currently trading price = 1.5million *56= $84 million.

Market value of preferred shares= 500,000 * 10= $500,0000.

Market value of debt =$50 million * 1150= $57500 million

C)

WACC Formula = (E/A * Ke) + (D/A) * Kd * (1 – Tax rate)

E = Market Value of Equity
A = Total market value of equity & debt
Ke = Cost of Equity
D = Market Value of Debt
Kd = Cost of Debt
Tax Rate = Corporate Tax Rate

Cost of equity can be found by DDM

Ke= Expected Dividend in 1 year ÷ Current Stock Price + Growth Rate

Ke=7/(56+0.02)=0.124

WACC=((84/(84+57500)*0.124)+(57500/(84+57500))*0.07*(1-0.35)= 0.045 or 4.5%

So the firms cost is 4.5%

jeff jeffy answered 1 year ago

Willerton Industries’ long term debt is comprised of 20-year $1,000 face value bonds totaling $65 million...

Willerton Industries’ long term debt is comprised of 20-year $1,000 face value bonds totaling $65 million issued seven years ago at an 8% coupon rate. The bonds are now selling to yield 6%. Willerton’s preferred is from a single issue of $100 par value totaling $15 million, 9% preferred stock that is now selling to yield 8%. Willerton has four million shares of common stock outstanding at a current market price of $31. Calculate Willerton’s market value based capital structure....

American Hat has $1,000 face value bonds outstanding with a market price of $1,150.

American Hat has $1,000 face value bonds outstanding with a market price of $1,150. The bonds pay interest semiannually, mature in 8 years, and have a yield to maturity of 5.98 percent. What is the current yield? Multiple Choice 7.28 percent 6.15 percent 6.44 percent 7.06 percent

a. The ABC company issued bonds with a face value of $1,000 each. The bonds carry...

a. The ABC company issued bonds with a face value of $1,000 each. The bonds carry an 8 percent coupon, pay interest semi-annually, and mature in 7 years. What is the current price of these bonds if the yield to maturity is 12 percent? b. If the market price of the bond is $1,050, do you buy or sell the bond? Why? c. What type of bond is this? Why?

Your firm has issued ten-year zero-coupon bonds with a $1,000 face value. If the bonds are...

Your firm has issued ten-year zero-coupon bonds with a $1,000 face value. If the bonds are currently selling for $514.87. What is the yield to maturity?

Bonds: The company issued 80,000 bonds. The bonds have a $1,000 face value with 7.5% coupons...

Bonds: The company issued 80,000 bonds. The bonds have a $1,000 face value with 7.5% coupons with annual payments, 7 years to maturity, and currently sell for $925. The marginal tax rate is 12%. Common Stock: The company has 500,000 shares of common stock outstanding, selling for $41 per share. The company’s beta is 1.25, the risk free rate is 2%, and the market risk premium is 9%. Preferred Stock: The company issued 100,000 shares of preferred stock. Preferred stock...

On January 1, 2024, Fabrikam Labs issued 1,000 bonds, each with a face value of $1,000,...

On January 1, 2024, Fabrikam Labs issued 1,000 bonds, each with a face value of $1,000, for 102.7323. The stated interest is 3.8%, and the market rate at the time the bonds were issued was 3.2%. The bonds are due on January 1, 2029 (5 year term) with interest payments due annually every January 1st. The company received cash from the sale of the bonds. Using the effective-interest method calculate and record the December 31, 2025 journal entry for the...

On January 1, 2019, ABC Company issued bonds with a face value of $1,000 and a...

On January 1, 2019, ABC Company issued bonds with a face value of $1,000 and a coupon rate of 8 percent. The bonds mature in 2 years and pay interest on June 30 and December 31 each year. The market rate is 12% annually. The present value of $1 table and the present value of annuity of $1 table are provided on the next page. Round your final answers to the nearest whole dollar. (1) What is the issue price...

a.Zap Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If...

a.Zap Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is (6%) and the current yield to maturity is 9%, what is the firm’s current price per bond? Answer is ________________________ b.You want to invest in a stock that pays $7.00 annual cash dividends for the next 6 years. At the end of the sixth year, you will sell the stock for $30.00. If you want to earn (6%) on...

the company has an outstanding issue of bonds with a par value of $1,000 and paying...

the company has an outstanding issue of bonds with a par value of $1,000 and paying a 3.80 percent p.a. coupon rate with semi‑annual payments. The bonds were issued 30 years ago and have 15 years to maturity. What should be the current price per bond, assuming a 4.28 percent p.a. yield on comparable securities? please show all calculations on excel

Several years ago, Castles in the sand Inc. issued bonds at face value of 1,000 at...

Several years ago, Castles in the sand Inc. issued bonds at face value of 1,000 at a yield to maturity of 8.6%. Now, with 7 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15%. What is the price of the bond now? (Assume semi-annual coupon payments) Suppose that investors believe that Castles can make good on the promise coupon payments but that...