Answers
SOLUTION:
calculation of market value weight | |||
Financing | working | market value | Weight |
8% bond | 120000*1100 | 132000000 | 35.05% |
zero coupon bond | 290000*175 | 50750000 | 13.47% |
preferred stock | 210000*70 | 14700000 | 3.90% |
Equity | 3200000*56 | 179200000 | 47.58% |
total market value | 376650000 | 100.00% |
Calculation of cost of capital:
8 percent bond: | |
1100=40*(PVIFA r%,40) + 1000*(PVIF r%,40) | |
r=3.53% | |
since the coupon payments are semi-annual , YTM on bonds is | |
3.53%*2 | 7.06% |
after tax cost of 8% coupon debt = 7.06*(1-0.4) | 4.24% |
zero coupon bond: | |
175=1000*(PVIF r%,60) | |
r=2.95% | |
since the coupon payments are semi-annual , YTM on bonds is | |
2.95%*2 | 5.90% |
after tax cost of zero coupon debt = 5.90*(1-0.4) | 3.54% |
cost of preferred stock (rp)=Dividend/market price=6/70 | 8.57% |
cost of equity (re) = risk free rate + beta*market risk premium | |
0.04+1.05*0.07 | 11.35% |
calculation of WACC | |||
Financing | after tax cost of capital | weight | |
a | b | a*b | |
8% bond | 4.24% | 35.05% | 1.48% |
zero coupon bond | 3.54% | 13.47% | 0.48% |
preferred stock | 8.57% | 3.90% | 0.33% |
Equity | 11.35% | 47.58% | 5.40% |
WACC | 7.70% |