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Unformatted text preview: 8,071.43 Step 4 Divide by # shares outstanding 8,071.43 100 $80.71 This is the estimated intrinsic value 3. ABC Company 40% debt 10% preferred stock 50% common stock Average coupon on bonds is 7% YTM is 8% Company’s marginal tax rate is 35% Preferred stock’s current dividend is $3.00 Current price is $40 Company’s stock’s beta is 1.2 Risk free rate is 4.0% Market risk premium is 8.0% What is cost of debt, cost of preferred stock , cost of equity and WACC Cost of debt= YTM (1t) .08 ( 1.35)= .052 or 5.2% Cost of preferred = current dividend Current price $3.00 $40.00 .075 or 7.5% Cost of Equity Use CAPM to determine r R = r rf +B(r mr rf ) R = .04 +1.2(.08) .136 or 13.6% WACC = (.40)(.052)+(.10)(.075)+(.50)(.136) .0208+.0075+.068 .0963 or 9.63%...
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 Fall '08
 sloan
 Corporate Finance

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