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:LUVFINANCE, Inc. is estimating its WACC. It is operating at
its optimal capital structure. Its outstanding bonds have a 12
percent coupon, paid semiannually, a current maturity of 17
years, and sell for $1,162 (Hint: use the current bond
price, $1,162, when computing market value of debt). It has
100,000 bonds outstanding. The firm can issue new 20-year
maturity semiannual bonds at par but will incur flotation
costs of $50 per bond (Hint: the coupon rate on the new
bonds the YTM on existing bonds). The firm could sell, at
par, $100 preferred stock that pays a 12 percent annual
dividend that is currently selling for $120. The firm currently
has 1,000,000 shares of preferred stock outstanding. Rollins'
beta is 1.16, the risk-free rate is 3 percent, and the market
risk premium is 6 percent. The common stock currently sells
for $100 a share and there are 5,000,000 shares
=
outstanding. The firm's marginal tax rate is 40 percent.
What is the WACC?
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