The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,434.63 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $16 per share. The preferred shares pay an annual dividend of $1.20. Wildhorse also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Wildhorse is subject to a 40 percent marginal tax rate, then what is the firm's weighted average cost of capital?
The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,434.63 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $16 per share. The preferred shares pay an annual dividend of $1.20. Wildhorse also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Wildhorse is subject to a 40 percent marginal tax rate, then what is the firm's weighted average cost of capital?
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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Transcribed Image Text:**Case Study: Wildhorse Products Co.**
**Overview:**
The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) with a maturity of 15 years and a current price of $1,434.63 per bond. The company has 2 million preferred shares outstanding, priced at $16 per share, paying an annual dividend of $1.20. Additionally, Wildhorse has 14 million shares of common stock outstanding, priced at $20.00 per share. The firm expects to pay a $2.20 common dividend one year from today, with an anticipated growth of 5 percent per year indefinitely. Given a 40 percent marginal tax rate, the task is to determine the firm's weighted average cost of capital (WACC).
**Excel Template Usage:**
> **Note:** This Excel template replicates the problem as presented in the textbook. Ensure you transfer the problem statement from this screen for easy reference. Update any pre-entered values that differ from the textbook version.
**Problem (a1): Calculation of Weights**
- **Feedback:** Your answer is incorrect.
- **Instructions:** Calculate the weights for debt, common equity, and preferred equity. *(Round intermediate calculations and final answers to 4 decimal places, e.g., 1.2514.)*
- **Debt:** 0.5
- **Preferred Equity:** 0.0333
- **Common Equity:** 0.4667
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