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 100,000shares 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 of1.5. The market risk premium is 8% and the risk rate is 4 %. Assuming a 40% tax rate, what is the company's WACC?

Weighted average cost of capital of the firm under which the cost related to all sources of…

Answered: A corporation has 10,000 bonds…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Firm Z has issued 1,000,000 bonds. Each bond is priced at $929 and has a face value of $1000. It pays annual coupon payments and has a coupon rate of 3%. The bonds will mature in 20 years. Stock price of Firm Z is $10, and there are 50 million shares outstanding. There are 2 million shares of preferred stock, which offers $2 dividend and is priced at $40. Equity beta of Firm Z is 1.5 and current market portffolio yields 8% and the risk free rate is 2%. Corproate tax rate is 30%. Find the costs of debt, equity, preferred stock and WACC. Please show your work.
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-taxyield to maturity of 10%. The bond issue has face value of S1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a S7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: a) Calculate the current price of the corporste bond? b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?, c) Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% (. d) Calculate the current market…
True or False. A company borrows additional financing and as a result their weight of debt increases (holding dollars of equity constant). Because the weight of debt increases, the company's WACC will always decrease. True O False
A corporation has 9,000 bonds outstanding with a 5% annual coupon rate, 7 years to maturity, a $1,000 face value, and a $1,200 market price. The company's 110,000 shares of preferred stock pay a $4 annual dividend, and sell for $40 per share. The company's 500,000 shares of common stock sell for $25 per share and have a beta of 1 The risk free rate is 5%, and the market return is 11%. Calculate cost of debt? Briefly show your steps. Calculate cost of preferred stock? Briefly show your steps. Calculate cost of equity? Briefly show your steps. what is company's pre-tax WACC? Briefly show your steps. What are the weight of debt, preferred stock and equity?Briefly show your steps.
The IPO Investment Bank has the following financing outstanding. Debt: 20,000 bonds with a coupon rate of 12 percent and a current price quote of 110; the bonds have 20 years to maturity. 190, 000 zero coupon bonds with a price quote of 20.5 and 30 years until maturity. Both bonds have a par value of $1,000 and semiannual coupons. Preferred stock: 110,000 shares of 10 percent preferred stock with a current price of $85, and a par value of $100. Common stock: 2,200, 000 shares of common stock; the current price is $71, and the beta of the stock is 1.45. Market: The corporate tax rate is 21 percent, the market risk premium is 5 percent, and the risk - free rate is 2 percent. What is the WACC for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
A&P Inc., the grocery store chain, has 6 million shares of common stock outstanding which currently trade for $40 per share. The company also has 150,000 bonds each with a face value of $1,000 and annual coupons of $50. The bonds have 6 years to maturity and the next coupon is due in one year. The yield on the bonds is 5%. The company's beta is 1.05, the risk-free rate is 3%, and the expected return on the market is 8%. The tax rate is 35%. What is A&P's WACC? Express your answer in percentage form rounded to two decimal places. WACC = ?%
Suppose Westerfield Co. has the following financial information: Debt: 900, 000 bonds outstanding with a face value of $1,000. The bonds currently trade at 85% of par and have 12 years to maturity. The coupon rate equals 7%, and the bonds make semiannual interest payments. Preferred stock: 600,000 shares of preferred stock outstanding; currently trading for $108 per share, paying a dividend of $9 annually. Common stock: 25,000,000 shares of common stock outstanding; currently trading for $185 per share. Beta equals 1.22. Market and firm information: The expected return on the market is 9%, the risk - free rate is 5%, and the tax rate is 21 %. Calculate the weight of debt in the capital structure. (Enter percentages as decimals and round to 4 decimals)
McCann Catching, Inc. has 3.00 million shares of stock outstanding. The stock currently sells for $12.79 per share. The firm's debt is publicly traded and was recently quoted at 89.00% of face value. It has a total face value of $19.00 million, and it is currently priced to yield 10.00%. The risk free rate is 3.00% and the market risk premium is 8.00%. You've estimated that the firm has a beta of 1.20. The corporate tax rate is 34.00%. The firm is considering a $45.89 million expansion of their production facility. The project has the same risk as the firm overall and will earn $11.00 million per year for 7.00 years. What is the NPV of the expansion? (answer in terms of millions, so 1,000,000 would be 1.0000)
Jeff Fisher Industries finances its projects with 40% debt, 10% preferred stock, and 50% common stock. • The company just issued 10-year bonds with a coupon rate of 11% that currently trade at $1,446.32 (semi-annually compounded). Newly issued preferred stock will pay annual dividends of $2 per share. The current price of preferred stock is $25 per share. • The risk-free rate is 6%. The market rate of return is 14%. Fisher Industries' beta is equal to 0.9. The company's tax rate is 40%. The flotation cost of issuing preferred stock is 10%.
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: Calculate the current price of the corporate bond? Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% Calculate the current market…

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