Question

Use the following information about Fox Corp. for problems 7-11.

Common stock: 5,000 shares outstanding, $85 per share. Fox will pay a dividend of $1.20 next year and this dividend is expected to grow at 5% per year.

Bonds: 3,000 bonds outstanding, with a 3% coupon paid semiannually, 3 years to maturity, and a market price of $996 per bond.

Preferred Stock: 500 shares outstanding with annual dividends of $4.00, currently selling at $75.

Fox Corp.'s marginal tax rate is 25%.

-Fox Corp's Weight of Equity=12.32%

-Fox Corp's After Tax Cost of Debt= 2.36%

-Fox Corp's Cost of Preferred Stock =5.33%

So what is:

What is Fox Corp's Cost of Equity and What is Fox Corps's WACC?

Answer 1

Debt:

Number of bonds outstanding = 3,000
Current Price = $996

Value of Debt = 3,000 * $996
Value of Debt = $2,988,000

After-tax Cost of Debt = 2.36%

Preferred Stock:

Number of shares outstanding = 500
Current Price = $75

Value of Preferred Stock = 500 * $75
Value of Preferred Stock = $37,500

Cost of Preferred Stock = 5.33%

Equity:

Number of shares outstanding = 5,000
Current Price = $85

Value of Equity = 5,000 * $85
Value of Equity = $425,000

Cost of Equity = Expected Dividend / Current Price + Growth Rate
Cost of Equity = $1.20 / $85.00 + 5.00%
Cost of Equity = 6.41%

Value of Firm = Value of Debt + Value of Preferred Stock + Value of Equity
Value of Firm = $2,988,000 + $37,500 + $425,000
Value of Firm = $3,450,500

Weight of Debt = $2,988,000 / $3,450,500
Weight of Debt = 0.8660

Weight of Preferred Stock = $37,500 / $3,450,500
Weight of Preferred Stock = 0.0108

Weight of Equity = $425,000 / $3,450,500
Weight of Equity = 0.1232

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Preferred Stock * Cost of Preferred Stock + Weight of Equity * Cost of Equity
WACC = 0.8660 * 2.36% + 0.0108 * 5.33% + 0.1232 * 6.41%
WACC = 2.89%