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Winters Whistle Co. has 3.4 million shares of $3.50 par value common stock at a price...

Winters Whistle Co. has 3.4 million shares of $3.50 par value common stock at a price of $29. The stock has a current dividend of $1.35 and a growth rate of 8%. The company has 75,000 7.4%, 16-year bonds currently at a quote of 102.1. The firm's tax rate is 30%

A. Calculate the cost of equity and the cost of debt.

B. Calculate the book value weights of both equity and debt.

C. Calculate the market value weights of both equity and debt.

D. Calculate the WACC under book value weights

E.. Calculate the WACC under market value weights.

Expert Solution

Answer A.

Bond:

Number of bonds outstanding = 75,000
Face Value = $1,000
Current Price = 102.1%*$1,000 = $1,021

Book Value of Debt = 75,000 * $1,000
Book Value of Debt = $75,000,000

Market Value of Debt = 75,000 * $1,021
Market Value of Debt = $76,575,000

Annual Coupon Rate = 7.4%
Semiannual Coupon Rate = 3.7%
Semiannual Coupon = 3.7%*$1,000 = $37

Time to Maturity = 16 years
Semiannual Period to Maturity = 32

Let semiannual YTM be i%

$1,021 = $37 * PVIFA(i%, 32) + $1,000 * PVIF(i%, 32)

Using financial calculator:
N = 32
PV = -1021
PMT = 37
FV = 1000

I = 3.59%

Semiannual YTM = 3.59%
Annual YTM = 2 * 3.59%
Annual YTM = 7.18%

Before-tax Cost of Debt = 7.18%
After-tax Cost of Debt = 7.18% * (1 - 0.30)
After-tax Cost of Debt = 5.03%

Equity:

Book Value of Equity = Number of Shares * Par Value per share
Book Value of Equity = 3,400,000 * $3.50
Book Value of Equity = $11,900,000

Market Value of Equity = Number of Shares * Market Price per share
Market Value of Equity = 3,400,000 * $29.00
Market Value of Equity = $98,600,000

Current Dividend, D0 = $1.35
Growth Rate, g =8%

Expected Dividend, D1 = D0 (1+g)
Expected Dividend, D1 = $.35 * (1+0.08) = $1.46

Cost of Equity = D1 / P0 + g
Cost of Equity =$1.46 / $29 + 0.08
Cost of Equity = 13.03%

Answer of Part b:

Book Value of Debt = $75,000,000
Book Value of Equity = $11,900,000

Book Value of Firm = Book Value of Debt + Book Value of Equity
Book Value of Firm = $75,000,000 + $11,900,000
Book Value of Firm = $86,900,000

Weight of Debt = $75,000,000 / $86,900,000
Weight of Debt = 0.0863

Weight of Equity = $11,900,000 / $86,900,000
Weight of Equity = 0.1369

Answer of Part c:

Market Value of Debt = $76,575,000
Market Value of Equity = $98,600,000

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $76,575,000 + $98,600,000
Market Value of Firm = $175,175,000

Weight of Debt = $76,575,000 / $175,175,000
Weight of Debt = 0.4371

Weight of Equity = $98,600,000 / $175,175,000
Weight of Equity = 0.5629

Answer of Part D:

WACC = Weight of Debt * After cost of Debt + Weight of Equity * Cost of Equity
WACC = 0.0863* 5.03% + 0.1369 * 13.03%
WACC = 2.22%

Answer of Part E:

WACC = Weight of Debt * After cost of Debt + Weight of Equity * Cost of Equity
WACC = 0.4371 * 5.03% + 0.5629 * 13.03%
WACC = 9.53%

jeff jeffy answered 1 year ago

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