example 4

# example 4 - yield these bonds will have to provide will...

This preview shows pages 1–3. Sign up to view the full content.

* Make-A-Friend  Example #4 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% . Emerald Enterprises has decided to raise an  additional  \$7,000,000  in financing by  issuing  15 year bonds . The amount of  preferred stock and common stock will  remain the same. The firm’s investment  bankers told Emerald Enterprises that the

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: yield these bonds will have to provide will depend on the rating after the issue. Bond ratings are based on the company’s debt to total capitalization ratio. Using the bond ratings on the following slide, determine the new WACC. * Calculate the WACC Common Stock Data: CS Shares = 200,000 CS Mkt Value = \$105 D 0 = \$2.75 CS growth = 6% CS Cost = 8.78% Total MV = \$21 million * Calculate the WACC Common Stock Data: CS Shares = 200,000 CS Mkt Value = \$105 D 0 = \$2.75 CS growth = 6% Total MV = \$21 million * Calculate the WACC WACC = [(weight D )* k D *(1-T)] + (weight CS )* k CS + (weight PS )* k PS = [(0.24027)*7.95%*(1-0.4)] + (0.72081*8.78%) + (0.03893*12.8%) WACC = 1.14609 + 6.32871 + 0.4983 WACC = 7.973%...
View Full Document

{[ snackBarMessage ]}

### Page1 / 3

example 4 - yield these bonds will have to provide will...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online