Chapter 13, Problem 12QAP

a

Summary Introduction

Adequate information:

Bonds outstanding $\left(\text{BO}\right)$ = 175,000

Common stock outstanding $\left(\text{SO}\right)$ = 6,400,000

Beta of the stock $\left(\text{β}\right)$ = 1.15

Current price per share $\left({\text{P}}_{\text{S}}\right)$ = $53

Coupon rate of Bond $\left({\text{CR}}_{\text{B}}\right)$ = 6.20%

Face value of Bond $\left({\text{FV}}_{\text{B}}\right)$ = $1,000

Selling rate of Bond $\left({\text{R}}_{\text{B}}\right)$ = 106%

Price of Bond $\left({\text{PV}}_{\text{B}}\right)$ = $1,060

Term duration of Bond $\left({\text{T}}_{\text{B}}\right)$ = 25 years

Number of compounding periods in a year $\left({\text{N}}_{\text{B}}\right)$ = 2

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 3.10%

Market risk premium $\left({\text{R}}_{\text{M}}\right)$ = 6.80%

Tax rate $\left(\text{t}\right)$ = 22%

To compute: Market value capital structure for the company M.

Introduction: The market value refers to the value that reflects the current market projections in the valuation.

b

Summary Introduction

Adequate information:

Bonds outstanding $\left(\text{BO}\right)$ = 175,000

Common stock outstanding $\left(\text{SO}\right)$ = 6,400,000

Beta of the stock $\left(\text{β}\right)$ = 1.15

Current price per share $\left({\text{P}}_{\text{S}}\right)$ = $53

Coupon rate of Bond $\left({\text{CR}}_{\text{B}}\right)$ = 6.20%

Face value of Bond $\left({\text{FV}}_{\text{B}}\right)$ = $1,000

Selling rate of Bond $\left({\text{R}}_{\text{B}}\right)$ = 106%

Price of Bond $\left({\text{PV}}_{\text{B}}\right)$ = $1,060

Term duration of Bond $\left({\text{T}}_{\text{B}}\right)$ = 25 years

Number of compounding periods in a year $\left({\text{N}}_{\text{B}}\right)$ = 2

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 3.10%

Market risk premium $\left({\text{R}}_{\text{M}}\right)$ = 6.80%

Tax rate $\left(\text{t}\right)$ = 22%

To compute: WACC

Introduction: Weighted average cost of capital (WACC) refers to the cost of capital from various sources such as common stocks, preferred stocks, bonds, etc.