Balance Sheet Data Long-Term Debt 80,000,000 Preferred Stock 20,000,000 Common Equity 20,000,000 Number of shares of Common 1,500,000 Price per share Common $42 Number of shares of Preferred 150,000 Price per share Preferred $108 Number of...

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Finance

Balance Sheet Data
               Long-TermDebt              80,000,000
               PreferredStock               20,000,000
               CommonEquity               20,000,000
Number of shares of Common               1,500,000                            Price per shareCommon             $42
Number of shares ofPreferred                   150,000                            Price per sharePreferred            $108
Number of 8% Coupon 25-year Bonds        40,000                           Price of 8% 25-yearBonds           $1075
Number of 6% Coupon 15-year Bonds        40,200                           Price of 6% 15-yearBonds           $920
Forecasted Dividend on Common(D₁)           $3.25                           Dividend Rate onPreferred         9.5%
Par Value ofPreferred                                           $100                          Current 10-Year Treasury Yld.     4.3%
Standard Deviation ofStock                                   40%                         Correlation Stock vs. Market      0.50
Standard Deviation ofMarket                               15%                         Market RiskPremium                    4.8%
Risk Premium of our Stock over our 15-yrBonds         3.8%          Forecasted Constant Growth      2.9%
TaxRate                                                                         25%                         Flotation costs onBonds              1.2%
Flotation costs onPreferred                                  2.2%
Calculate the appropriate weights to use for the financingsources. (Hint: Assume that the firm feels their current mix oflong-term debt is good and would like to raise capital with thesame mix of maturities)
Calculate the after-tax cost of debt (hint: You can account forthe two bonds by taking a weighted average of their cost or bykeeping them separate and putting both into the WACC formula attheir individual weights). Note that there are flotation costs of1.2% on bonds.
Calculate the cost of preferred. Note that there are flotationcosts of 2.2% on preferred stock.
Calculate the cost of common (Hint: Use all three methods andtake an average). Note that all common equity will come frominternally generated equity (retained earnings) which means no newshares will be issued and no flotation costs incurred.
Calculate the WACC
Why are firms likely to prefer internally generated equity toissuing new shares of common? Identify and briefly explain tworeasons.
If my firm had two separate divisions – one relatively low riskand one relatively high risk, how might I apply the WACC to eachdivision?

Answer & Explanation Solved by verified expert

3.7 Ratings (523 Votes)

A Weights are calculated as per current prices and number of securities issued Pricenumber of securities Weight Security valueTotal value 8 25year Bonds 43000000 Debt 79984000 5025 6 15year Bond 36984000 Preferred stock 16200000 Preferred stock 16200000 1018 Common equity 63000000 Common equity 63000000 3958 Total 159184000 B Cost of debt YTM for 8 25year bond FV or par value 1000 PV price net of flotation cost 10751120 106210 PMT or semiannual coupon payment coupon rate2par value 821000 See Answer

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Balance Sheet Data Long-TermDebt 80,000,000 PreferredStock 20,000,000 CommonEquity 20,000,000Number of shares of Common 1,500,000 Price per shareCommon $42Number of shares ofPreferred 150,000 Price per sharePreferred $108Number of 8% Coupon 25-year Bonds 40,000 Price of 8% 25-yearBonds $1075Number of 6% Coupon 15-year Bonds 40,200 Price of 6% 15-yearBonds $920Forecasted Dividend on Common(D1) $3.25 Dividend Rate onPreferred 9.5%Par Value ofPreferred $100 Current 10-Year Treasury Yld. 4.3%Standard Deviation ofStock 40% Correlation Stock vs. Market 0.50Standard Deviation ofMarket 15% Market RiskPremium 4.8%Risk Premium of our Stock over our 15-yrBonds 3.8% Forecasted Constant Growth 2.9%TaxRate 25% Flotation costs onBonds 1.2%Flotation costs onPreferred 2.2%Calculate the appropriate weights to use for the financingsources. (Hint: Assume that the firm feels their current mix oflong-term debt is good and would like to raise capital with thesame mix of maturities)Calculate the after-tax cost of debt (hint: You can account forthe two bonds by taking a weighted average of their cost or bykeeping them separate and putting both into the WACC formula attheir individual weights). Note that there are flotation costs of1.2% on bonds.Calculate the cost of preferred. Note that there are flotationcosts of 2.2% on preferred stock.Calculate the cost of common (Hint: Use all three methods andtake an average). Note that all common equity will come frominternally generated equity (retained earnings) which means no newshares will be issued and no flotation costs incurred.Calculate the WACCWhy are firms likely to prefer internally generated equity toissuing new shares of common? Identify and briefly explain tworeasons.If my firm had two separate divisions – one relatively low riskand one relatively high risk, how might I apply the WACC to eachdivision?