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ABC Corporation has 14 million shares of common stock outstanding, 900,000 shares of 8 percent preferred...

ABC Corporation has 14 million shares of common stock outstanding, 900,000 shares of 8 percent preferred stock outstanding and 220,000 semiannual bonds outstanding with coupon rate of 12% and par value of $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.20, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 119.92 percent of par. The expected return on the market portfolio is 14 percent, T-bills are yielding 6 percent, and the firm's tax rate is 20 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project?

Solutions

Expert Solution

Cost of equity =
Risk free rate +(market rate - risk free rate)*beta 15.60%
6%+(14%-6%)*1.2
Cost of debt =
we have to use financial calculator to solve this
put in calculator-
FV 1000
PV -1199.2
PMT 1000*12%/2 60
N 17*2 34
Compute I 4.80%
Post tax cost of debt =
4.8%*(1-20%) 3.84%
Cost of preferred stock
annual dividend / Price today 10.00%
8/80
Computation of WACC
Source Value weight cost weight *cost
Debt 263824000 220000*1000*119.92% 30.97% 3.84% 1.19%
equity 588000000 14mil*42 69.03% 15.60% 10.77%
Preferred stock 72000000 900,000*80 8.45% 10.00% 0.85%
851824000 12.80%
WACC = 12.80%
answer = 12.80%

jeff jeffy answered 2 years ago
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