Question

In: Finance

Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 12.00-year,...

Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.27% coupon bonds which sell for 98.50% of par. Their stock currently has a market value of $24.14 and Mr. Bensen believes the market estimates that dividends will grow at 3.26% forever. Next year’s dividend is projected to be $2.29. Assuming a marginal tax rate of 29.00%, what is their WACC (weighted average cost of capital)?

Solutions

Expert Solution

Weight of equity = 1-D/A
Weight of equity = 1-0.3
W(E)=0.7
Weight of debt = D/A
Weight of debt = 0.3
W(D)=0.3
Cost of equity
As per DDM
Price = Dividend in 1 year/(cost of equity - growth rate)
24.14 = 2.29/ (Cost of equity - 0.0326)
Cost of equity% = 12.75
Cost of debt
                  K = Nx2
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =12x2
985 =∑ [(5.27*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^12x2
                   k=1
YTM = 5.4418596104
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 5.4418596104*(1-0.29)
= 3.863720323384
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=3.86*0.3+12.75*0.7
WACC =10.08%

Related Solutions

Caspian Sea Drinks' is financed with 63.00% equity and the remainder in debt. They have 12.00-year,...
Caspian Sea Drinks' is financed with 63.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.67% coupon bonds which sell for 97.15% of par. Their stock currently has a market value of $25.94 and Mr. Bensen believes the market estimates that dividends will grow at 3.86% forever. Next year’s dividend is projected to be $2.73. Assuming a marginal tax rate of 24.00%, what is their WACC (weighted average cost of capital)?
Caspian Sea Drinks' is financed with 65.00% equity and the remainder in debt. They have 12.00-year,...
Caspian Sea Drinks' is financed with 65.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.55% coupon bonds which sell for 98.92% of par. Their stock currently has a market value of $24.82 and Mr. Bensen believes the market estimates that dividends will grow at 3.33% forever. Next year’s dividend is projected to be $2.50. Assuming a marginal tax rate of 35.00%, what is their WACC (weighted average cost of capital) 4 Decimal place answer please.
Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 12.00-year,...
Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.42% coupon bonds which sell for 98.37% of par. Their stock currently has a market value of $25.81 and Mr. Bensen believes the market estimates that dividends will grow at 3.16% forever. Next year’s dividend is projected to be $2.29. Assuming a marginal tax rate of 22.00%, what is their WACC (weighted average cost of capital)? Answer Format: Percentage Round to: 2...
Caspian Sea Drinks' is financed with 62.00% equity and the remainder in debt. They have 11.00-year,...
Caspian Sea Drinks' is financed with 62.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.94% coupon bonds which sell for 98.90% of par. Their stock currently has a market value of $24.18 and Mr. Bensen believes the market estimates that dividends will grow at 3.22% forever. Next year’s dividend is projected to be $2.77. Assuming a marginal tax rate of 26.00%, what is their WACC (weighted average cost of capital)? 4 decimal place answer.
Caspian Sea Drinks' is financed with 60.00% equity and the remainder in debt. They have 11.00-year,...
Caspian Sea Drinks' is financed with 60.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.47% coupon bonds which sell for 97.80% of par. Their stock currently has a market value of $24.31 and Mr. Bensen believes the market estimates that dividends will grow at 3.90% forever. Next year’s dividend is projected to be $2.09. Assuming a marginal tax rate of 20.00%, what is their WACC (weighted average cost of capital)?
Caspian Sea Drinks' is financed with 60.00% equity and the remainder in debt. They have 10.00-year, semi-annual pay, 5.80% coupon bonds which sell for 97.91% of par.
Caspian Sea Drinks' is financed with 60.00% equity and the remainder in debt. They have 10.00-year, semi-annual pay, 5.80% coupon bonds which sell for 97.91% of par. Their stock currently has a market value of $24.05 and Mr. Bensen believes the market estimates that dividends will grow at 3.56% forever. Next year's dividend is projected to be $2.66. Assuming a marginal tax rate of 20.00%, what is their WACC (weighted average cost of capital)?
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5? a. The PJX5 will cost $2.16 million fully installed and has a 10 year life. It will be depreciated to a book value of $203,406.00...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5? a. The PJX5 will cost $1.97 million fully installed and has a 10 year life. It will be depreciated to a book value of $204,551.00...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5? a. The PJX5 will cost $1.91 million fully installed and has a 10 year life. It will be depreciated to a book value of $179,866.00...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is...
Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the NPV of the PJX5? a. The PJX5 will cost $2.01 million fully installed and has a 10 year life. It will be depreciated to a book value of $239,157.00...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT