Question

In: Finance

Daniel's Sound Systems has 300,000 shares of common stock outstanding at a market price of $50...

Daniel's Sound Systems has 300,000 shares of common stock outstanding at a market price of $50 a share. Daniel will pay in one year an annual dividend in the amount of $2.567 per share. The dividend growth rate is 5%. Daniel's also has 10,000 bonds outstanding with a par value of $1,000 per bond. The bonds carry a 8% coupon, pay interest semiannually, and mature in 10 years. The bonds are selling at a quoted price of 99.

The company's tax rate is 34%. What is Daniel's weighted average cost of capital?

Solutions

Expert Solution

Debt:

Number of bonds outstanding = 10,000
Face Value = $1,000
Current Price = 99% * $1,000 = $990

Value of Debt = 10,000 * $990
Value of Debt = $9,900,000

Annual Coupon Rate = 8%
Semiannual Coupon Rate = 4%
Semiannual Coupon = 4%*$1,000 = $40

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Let semiannual YTM be i%

$990 = $40 * PVIFA(i%, 20) + $1,000 * PVIF(i%, 20)

Using financial calculator:
N = 20
PV = -990
PMT = 40
FV = 1000

I = 4.07%

Semiannual YTM = 4.07%
Annual YTM = 2 * 4.07%
Annual YTM = 8.14%

Before-tax Cost of Debt = 8.14%
After-tax Cost of Debt = 8.14% * (1 - 0.34)
After-tax Cost of Debt = 5.37%

Equity:

Number of shares outstanding = 300,000
Current Price = $50

Value of Common Stock = 300,000 * $50
Value of Common Stock = $15,000,000

Cost of Common Equity = D1/P0 + g
Cost of Common Equity = $2.567 / $50 + 0.05
Cost of Common Equity = 10.13%

Value of Firm = Value of Debt + Value of Common Stock
Value of Firm = $9,900,000 + $15,000,000
Value of Firm = $24,900,000

Weight of Debt = $9,900,000/$24,900,000
Weight of Debt = 0.3976

Weight of Common Stock = $15,000,000/$24,900,000
Weight of Common Stock = 0.6024

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Common Stock*Cost of Common Stock
WACC = 0.3976*5.37% + 0.6024*10.13%
WACC = 8.24%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Sound Systems has 200 shares of common stock outstanding at a market price of $37 a...
Sound Systems has 200 shares of common stock outstanding at a market price of $37 a share. The firm recently paid an annual dividend in the amount of $1.20 per share and has a dividend growth rate of 4 percent. The firm also has 5 bonds outstanding with a face value of $1,000 per bond that are selling at 99 percent of par. The bonds have a coupon rate of 6 percent and a yield to maturity of 6.7 percent....
Sound Systems (SS) has 200,000 shares of common stock outstanding at a market price of $37...
Sound Systems (SS) has 200,000 shares of common stock outstanding at a market price of $37 a share. SS recently paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 4 percent. SS also has 4,500 bonds outstanding with a face value of $1,000 per bond that are selling at 99 percent of par. The bonds have a 6 percent coupon and a 6.7 percent yield to maturity. If the tax rate is 34...
Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36...
Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is...
Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36...
Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is...
Kim's Bridal Shoppe has 11,600 shares of common stock outstanding at a price of $50 per...
Kim's Bridal Shoppe has 11,600 shares of common stock outstanding at a price of $50 per share. It also has 285 shares of preferred stock outstanding at a price of $92 per share. There are 320 bonds outstanding that have a coupon rate of 6.9 percent paid semiannually. The bonds mature in 31 years, have a face value of $2,000, and sell at 109 percent of par. What is the capital structure weight of the common stock? .3989 .4864 .4654...
Court Casuals has 300,000 shares of common stock outstanding as of the beginning of the year...
Court Casuals has 300,000 shares of common stock outstanding as of the beginning of the year and has the following transactions affecting stockholders' equity during the year. May 18 Issues 22,000 additional shares of $1 par value common stock for $43 per share. May 31 Purchases 5,000 shares of treasury stock for $44 per share. July 1 Declares a cash dividend of $2 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury...
Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a...
Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share. The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share. The preferred stock has a par value of $100. The outstanding bonds mature in 17 years, have a total face (book) value of $750,000, a face value...
1) A compant has 50,000 shares of common stock outstanding at a market price of $20...
1) A compant has 50,000 shares of common stock outstanding at a market price of $20 a share. The common stock just paid a $1 annual dividend and has a divided growth rate of 5 percent. What is the total market value of common stock? What is the cost of equity (common stock)? 2) There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share. What is the total market value of preferred...
Prudential Transportation has 600,000 shares of common stock outstanding at a market price of $25 a...
Prudential Transportation has 600,000 shares of common stock outstanding at a market price of $25 a share. Last month, Prudential Transportation paid an annual dividend in the amount of $1.00 per share. The dividend growth rate is 5%. Prudential Transportation also has 21,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 5% coupon, pay interest annually, and mature in 10 years. The bonds are selling at 104% of face value. The company's tax rate...
Texas Instruments has 500,000 shares of common stock outstanding at a market price of $54 a...
Texas Instruments has 500,000 shares of common stock outstanding at a market price of $54 a share. Last month, Texas Instruments paid an annual dividend in the amount of $2.80 per share. The dividend growth rate is 5%. Texas Instruments also has 20,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 5% coupon, pay interest annually, and mature in 15 years. The bonds are selling at 104% of face value. The company's tax rate...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT