Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. caspian sea drinks' is financed with 70.00% equity

Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 12.00-year,...

Free

60.1K

Verified Solution

Question

Finance

Caspian Sea Drinks' is financed with 70.00% equity and theremainder in debt. They have 12.00-year, semi-annual pay, 5.27%coupon bonds which sell for 98.50% of par. Their stock currentlyhas a market value of $24.14 and Mr. Bensen believes the marketestimates that dividends will grow at 3.26% forever. Next year’sdividend is projected to be $2.29. Assuming a marginal tax rate of29.00%, what is their WACC (weighted average cost of capital)?

Answer & Explanation Solved by verified expert
3.8 Ratings (593 Votes)

Weight of equity = 1-D/A
Weight of equity = 1-0.3
W(E)=0.7
Weight of debt = D/A
Weight of debt = 0.3
W(D)=0.3
Cost of equity
As per DDM
Price = Dividend in 1 year/(cost of equity - growth rate)
24.14 = 2.29/ (Cost of equity - 0.0326)
Cost of equity% = 12.75
Cost of debt
                  K = Nx2
Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =12x2
985 =? [(5.27*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^12x2
                   k=1
YTM = 5.4418596104
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 5.4418596104*(1-0.29)
= 3.863720323384
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=3.86*0.3+12.75*0.7
WACC =10.08%

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

Caspian Sea Drinks' is financed with 70.00% equity and theremainder in debt. They have 12.00-year, semi-annual pay, 5.27%coupon bonds which sell for 98.50% of par. Their stock currentlyhas a market value of $24.14 and Mr. Bensen believes the marketestimates that dividends will grow at 3.26% forever. Next year’sdividend is projected to be $2.29. Assuming a marginal tax rate of29.00%, what is their WACC (weighted average cost of capital)?

Other questions asked by students

Physics
1.2K views

a Find the location of elements with Z 12 16 8 18 b Find the...

Basic Math
1.2K views

The probability a telesales represenative making a sale on a customer call is .15. Find the...

General Management
1.2K views

For your initial post, think about crisis management such as one of the recent school shootings....

Basic Math
1.2K views

7 Determine the point of intersection for the graphs of y 82x and y 2...

Statistics
1.2K views

If a fair coin is tossed 10 times what is the probability of getting all...

Calculus
1.2K views

Consider the indefinite integral u ex 5 and e z e 5 This can be...

Accounting
1.2K views

Check my work 3 You have just been hired by FAB Corporation, the manufacturer of...

Accounting
1.2K views

Please provide the correct answer: If Oriole Company expects to sell 1,250 units...

Accounting
1.2K views

Which do you think is a more effective process for decision making? Have you worked...

Accounting
1.2K views

Editing Voice Editor Reuse 1. "Sell me an apple!" Your task is to write a...

Accounting
1.2K views

Fernandez Corporation purchased a truck at the beginning of 2014 for $50,000. The truck is...

Finance
1.2K views

An investment project has annual cash inflows of $4,465, $3,709, $4,440, and $3,623 for the...