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example 3

# example 3 - Calculate the WACC Step 1 Determine Weights...

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* Make-A-Friend Example #3 Emerald Enterprises has a capital structure  made up of  200,000 shares  of common  stock and  18,145 shares  of preferred  stock.  The current market value of  common stock is  \$105 per share Emerald Enterprises stock just paid a  dividend of  \$2.75 .  The common stock’s  dividend is expected to grow by  6%  per  year forever. The preferred stock is issued at a par value  of  \$50 per share , but the market value  today is  \$62.50 per share .  An  \$8  dividend  is paid on each share of  preferred stock.  The company’s tax rate  is  40% .  Currently, Emerald Enterprises  does not use any debt.  Find the WACC.  * Calculate the WACC Common Stock Data: CS Shares = 200,000 CS Mkt Value = \$105

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D = \$2.75 CS growth = 6%

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Unformatted text preview: * Calculate the WACC Step 1: Determine Weights Debt Market Value : \$0 Common Stock Market Value : 200,000 shares x \$105 = \$21,000,000 Preferred Stock Market Value : 18,145 shares x \$62.50 = \$1,134,062.50 Total : \$0 + \$21,000,000 + \$1,134,062.50 = \$22,134,062.50 * Calculate the WACC Step 2: Determine Required Return Common Stock Return : CS Return = 2.75*(1 + 0.06) + 0.06 105 Preferred Stock Return : PS Return = 8/62.50 = 0.128 = 12.8% * Calculate the WACC WACC = [(weight CS )* k CS ] + (weight PS )* k PS WACC = [(21,000,000/22,134,062.50)* 8.78%)] + [(1,134,062.50/22,134,062.50)*12.8 %] = WACC = (0.94876* 8.78%) + (0.05124*12.8) WACC = 8.3302 + 0.65587 = 8.986%...
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example 3 - Calculate the WACC Step 1 Determine Weights...

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