3. Kruger Industrial Smoothing has a target capital structure consisting of 30% debt, 5% preferred stock, and...

90.2K

Verified Solution

Question

Finance

3.     KrugerIndustrial Smoothing has a target capital structure consisting of30% debt, 5% preferred stock, and 65% common equity. Kruger has20-year, 7.25% semiannual coupon bonds that are selling for $875.Kruger’s preferred stock sells for $95 and pays a 9% dividend on a$100 par value. Kruger is a constant growth firm with a growth rateof 4% and just paid a dividend of $2.35 on its common stock that iscurrently selling for $30.00 per share. The beta is 1.25 and therisk free rate is 5.25%. The required return on the stock market is11.50%. The firm’s marginal tax rate is 40%.
        a.   What isKruger’s component after-tax component cost of debt?
        b.   What isKruger’s component cost of preferred stock?
        c.   What isKruger’s component cost of common equity based on the CAPM?
        d.   What isKruger’s component cost of common equity based on the DCFmodel?
        e.   What isthe WACC for Kruger assuming the firm use an average component costof equity given the two       methodsused?

Answer & Explanation Solved by verified expert

3.9 Ratings (808 Votes)

Answer a Face Value 1000 Current Price 875 Annual Coupon Rate 725 Semiannual Coupon Rate 3625 Semiannual Coupon 3625 1000 Semiannual Coupon 3625 Time to Maturity 20 years Semiannual Period to Maturity 40 Let semiannual YTM be i 875 3625 PVIFAi 40 1000 PVIFi 40 Using See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

3. KrugerIndustrial Smoothing has a target capital structure consisting of30% debt, 5% preferred stock, and 65% common equity. Kruger has20-year, 7.25% semiannual coupon bonds that are selling for $875.Kruger’s preferred stock sells for $95 and pays a 9% dividend on a$100 par value. Kruger is a constant growth firm with a growth rateof 4% and just paid a dividend of $2.35 on its common stock that iscurrently selling for $30.00 per share. The beta is 1.25 and therisk free rate is 5.25%. The required return on the stock market is11.50%. The firm’s marginal tax rate is 40%. a. What isKruger’s component after-tax component cost of debt? b. What isKruger’s component cost of preferred stock? c. What isKruger’s component cost of common equity based on the CAPM? d. What isKruger’s component cost of common equity based on the DCFmodel? e. What isthe WACC for Kruger assuming the firm use an average component costof equity given the two methodsused?