Ch 14 Problem

Ch 14 Problem - = $11,000,000 Cost ofdebt = YTM: 8 N;...

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Comprehensive Problem A corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 8 years to maturity, a $1,000 face value, and a $1,100 market price. • The company's 100,000 shares of preferred stock pay a $3 annual dividend, and sell for $30 per share. • The company's 500,000 shares of common stock sell for $25 per share and have a beta of 1.5. The risk free rate is 4%, and the market return is 12%. Assuming a 400/0 tax rate, what is the company's WACC? 14-41 MV ofdebt = 10,000 x $1,100
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Unformatted text preview: = $11,000,000 Cost ofdebt = YTM: 8 N; -1,100 PV; 60 PMT; 1,000 FV; CPT I/Y = 4.48% MV ofpreferred = 100,000 x $30 = $3,000,000 Cost ofpreferred = 3/30 = 10% MV ofcommon = 500,000 x $25 = $12,500,000 Cost ofcommon = .04 + 1.5 x (.12 - .04) = 16% Total MV ofall securities = $IIM + $3M + $12.5M = 26.5M Weight ofdebt = IIM/26.5M = .4151 Weight ofpreferred = 3M/26.5M = .1132 Weight ofcommon = 12.5M/26.5M = .4717 WACC = .4151 x .0448 x (1 -.4) + .1132 x.1O + .4717 x .16 = .0979 = 9.8% 12.41...
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This note was uploaded on 11/22/2011 for the course BMGT 340 taught by Professor White during the Fall '08 term at Maryland.

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