Question

In: Finance

(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...

  1. (WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common stock is valued at $10 per share, with 2 million shares outstanding. It has a beta of 5, and market return is estimated to be 4% while treasury bills offer 1.5% risk-free rate. The preferred stock is valued at $15 per share, which pays dividend of $2 each year at a constant growth rate of 3%. Preferred stocks have 5 million shares outstanding. Finally, debt has a market value of $4 million dollars and pays an interest rate of 5%. Tax rate is 40%. Calculate WACC.

Show formula and work using hand-only. Do not use excel.

Solutions

Expert Solution

We would calculate the cost for each of the finance obtained.

Formula to calculate cost of equity using CAPM model

Ke = Rf + Beta*(Rm-Rf)

where Ke = cost of equity

Rf = risk free rate

Rm = market interest rate

Calculation of cost of equity

Ke = 0.015 + 5*(0.04-0.015)

Ke = 0.015 + 0.125

Ke = 0.015 + 0.125

Ke = 14%

The cost of equity is 14%

Formula to calculate cost of preferred stock

Kp = (D0*(1+g)/P) + g

where Kp = Cost of preference shares

D0 is the dividend paid

g = growth rate

P = price of preferred stock

Calculation of cost of preferred stock

Kp = (2*(1.03))/15 + 0.03

Kp = 2.06/15 + 0.03

Kp = 0.1373 + 0.03

Kp = 16.73%

The cost of preference share is 16.73%

Formula to calculate after tax cost of debt

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

Calculation of after tax cost of debt

After tax cost of debt = 0.05*(1-0.40)

After tax cost of debt = 3%

The after tax cost of debt is 3%

Calculation of Weights of each financing option

Value

Weights

Equity (2000000*10)

$20,000,000

20.20%

2000000/99000000

Preference share (5000000*15)

$75,000,000

75.76%

7500000/99000000

Debt

$4,000,000

4.04%

4000000/99000000

Total finance

$99,000,000

100.00%

Formula to calculate WACC

WACC = We*Ke + Wp*Kp + Wd*Kd

where We = weight of equity

Ke = Cost of equity

Wp = weight of preferred stock

Kp = cost of preferred stock

Wd = weight of debt

Kd = cost of debt

Calculation of WACC

WACC = (0.2020*0.14)+(0.7576*0.1673)+(0.0404*0.03)

WACC = 15.63%

The WACC of the company is 15.63%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common stock is valued at $10 per share, with 2 million shares outstanding. It has a beta of 5, and market return is estimated to be 4% while treasury bills offer 1.5% risk-free rate. The preferred stock is valued at $15 per share, which pays dividend of $2 each year at a constant growth rate of 3%. Preferred stocks have 5 million shares outstanding. Finally,...
Pealand Company has 50,000 shares of common stock outstanding and 2,000 shares of preferred stock outstanding....
Pealand Company has 50,000 shares of common stock outstanding and 2,000 shares of preferred stock outstanding. The common stock is $1.00 par value. The preffered stock has a $100 par value, a 5% dividend rate, and is noncumulative. On October 31, 2015, the company declares dividends of $0.25 per share for common. Provide the journal entry for the declaration of dividends.
Empire Today Inc. has 10 million shares of common stock outstanding, 300,000 shares of 5% preferred...
Empire Today Inc. has 10 million shares of common stock outstanding, 300,000 shares of 5% preferred stock outstanding, and 7 million of 6.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $85 per share and has a beta of 1.15, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 93% of par. The market risk premium is 11 percent, T-bills are yielding 2.14...
Empire Today Inc. has 10 million shares of common stock outstanding, 300,000 shares of 5% preferred...
Empire Today Inc. has 10 million shares of common stock outstanding, 300,000 shares of 5% preferred stock outstanding, and 7 million of 6.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $85 per share and has a beta of 1.15, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 93% of par. The market risk premium is 11 percent, T-bills are yielding 2.14...
Baker Company has common and preferred stock outstanding as follows. Common stock: 100,000 shares, $30 par...
Baker Company has common and preferred stock outstanding as follows. Common stock: 100,000 shares, $30 par value 8 percent preferred stock: 10,000 shares, $100 par value Dividends on preferred stock have not been paid for the last three years (in addition to the current year). a. If the company pays a total of $120,000 in dividends, how much will the common stockholders receive per share if the preferred stock is not cumulative? (Round your answer to 2 decimal places.) b....
Spicer Reports Corp has 400,000 shares of common stock outstanding, 200,000 shares of preferred stock outstanding,...
Spicer Reports Corp has 400,000 shares of common stock outstanding, 200,000 shares of preferred stock outstanding, and 40,000 bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for common stock equity in the computation of Spicer's WACC? A. 18.59% B. 19.49% C. 24.37% D. 62.50% E. 79.75% Comfort Chair, Inc. has a $1.5...
(TCO 4) Davis company has outstanding 120,000 shares of common stock and 5,000 shares of preferred...
(TCO 4) Davis company has outstanding 120,000 shares of common stock and 5,000 shares of preferred stock as of January 1, 2015. The preferred stock is convertible, and can be converted into 4 shares of common stock for each share of preferred. During the year, the following common stock transactions took place: Issued common stock on March 1, in the amount of 4,000 shares Issued a stock dividend (small) on all stock outstanding at April 1. The % of the...
A company has 9 million shares of common stock outstanding, 340,000 shares of 6 percent preferred...
A company has 9 million shares of common stock outstanding, 340,000 shares of 6 percent preferred stock outstanding, and 180,000 7.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $38 per share and has a beta of 1.50, the preferred stock currently sells for $88 per share, and the bonds have 20 years to maturity and sell for 119 percent of par. The market risk premium is 7.8 percent, T-bills are yielding 3 percent,...
An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a...
An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a price of $31.30 per share and with an expectation to continue to provide a dividend of $4.75 per share. There are 50,000 preferred shares outstanding, with a 3.10% dividend, $100 par value per share, and $61.80 market value per share. Given this information, what is the company's WACC? a) 13.53 % b) 12.91% c) 13.22 % d) 12.61 % e)12.30 %
Marie Corp. has $1,882 in debt outstanding and $2,269 in common stock (and no preferred stock)....
Marie Corp. has $1,882 in debt outstanding and $2,269 in common stock (and no preferred stock). Its marginal tax rate is 30%. Marie's bonds have a YTM of 5.6%. The current stock price (Po) is $45. Next year's dividend is expected to be $2.26, and it is expected to grow at a constant rate of 7% per year forever. The company's W.A.C.C. is ____%. Round your final answer to 2 decimal places (example: enter 12.34 for 12.34%), but do not...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT