Question

Hankins Corporation has 8.4 million shares of common stock outstanding, 590,000 shares of 7.4 percent preferred stock outstanding, and 184,000 of 8.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.90 per share and has a beta of 1.29, the preferred stock currently sells for $107.10 per share, and the bonds have 13 years to maturity and sell for 91.5 percent of par. The market risk premium is 7 percent, T-bills are yielding 5.7 percent, and the firm’s tax rate is 35 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
  

Market value weight of debt?
Market value weight of preferred stock?
Market value weight of equity?

b. If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
The weighted average cost of capital             %

Answer 1

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

MV of equity=64.9*8400000

=545160000

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

MV of Bond=1000*184000*0.915

=168360000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=107.1*590000

=63189000

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

=545160000+168360000+63189000 =

=816309000

Cost of equity

As per CAPM

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

Cost of equity% = 5.7 + 1.29 * (7)

Cost of equity% = 14.73

Cost of debt

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =13x2

915 =∑ [(8.6*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^13x2

k=1

YTM = 9.77

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

After tax cost of debt = 9.77*(1-0.35)

= 6.3505

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 7.4/107.1*100

=6.91

Weight of equity = MV of Equity/MV of firm

Weight of equity = 545160000/816309000

W(E)=0.6678

Weight of debt = MV of Bond/MV of firm

Weight of debt = 207960000/816309000

W(D)=0.2548

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

Weight of preferred equity = 63189000/816309000

W(PE)=0.0774

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

WACC=6.35*0.2548+14.73*0.6678+6.91*0.0774

WACC% = 11.99