Exam #3.docx - 1 Brady Inc has a targeted capital structure...

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1.) Brady Inc. has a targeted capital structure of 40% debt, 10% preferred stock, and 50% common stock. The marginal tax rate is 35%. Use the data below to calculate the company’s WACC. Ignore flotation costs. -The S&P 500 is expected to be up 12% over the next year. -Brady’s preferred stock that is being traded in the marketplace pays an annual dividend of $8.00. -Brady’s common stock sells for $25.00 per share. The expected dividend on the common stock next year is $2.00 per share. -Brady’s bonds sell at a discount. The ten year bonds are priced at 97% of par ($1000 par value).They are annual bonds with a 7% coupon rate. -Brady’s preferred stock sells for $75 per share. Treasury bonds are priced to yield 4%. -Management feels its investors expect a 6% growth rate for the stock. The beta of the stock is 1.2. Weights of different sources of capital Weight of debt = 0.40 Weight of equity = 0.50 Weight of preferred stock =0.10 Cost of debt = N=10 PV =-97*1000 FV=1000 PMT = 7%*1000 Rate = calculated in excel = 7.436% Before tax cost of debt = 7.436% Cost of equity = Risk free rate + Beta * (Market Return - Risk free rate)
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= 4% + 1.2*(12%-4%) = 0.04 + 0.096 =0.136 or 13.6% Cost of preferred share = preferred dividend / price of preferred share = 8/75 = 0.106667 or 10.667% WACC = Cost of equity * weight of equity + cost of debt * weight of debt *(1-tax rate) + cost of preferred share 
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