Resources Corporation is estimating its WACC. Its target capital structure is 40% debt, 10% preferred stock,...

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Resources Corporation is estimating its WACC. Its target capitalstructure is 40% debt, 10% preferred stock, and 50% common equity.Its bonds have an 8% coupon rate, paid semi-annually, a currentmaturity of 12 years, and sell for $1,080.29. The firm could sell,at par, $100 preferred stock which pays a 6.75% annual dividend(assume no flotation costs). Resources’ beta is 1.6, the risk-freerate [rRF] is 3%, and the market risk premium [RPM] is 5%.Resources is a constant-growth firm which just paid a dividend of$2.40, the common stock currently sells for $35.72 per share [Po],and has a growth rate of 4%. The firm’s marginal tax rate is 40percent.
a) What is Resources’ component cost of debt [Kd]?Calculate Kd for the semi-annual coupon bond
b) What is Resources’ cost of preferred stock[Kp]?
c) What is Resources’ cost of common stock (Ks) usingthe CAPM approach?
d) What is the firm’s cost of common stock (Ks) usingthe DDM approach?
e) What is Resources’ WACC? (Use the average Ks derivedunder the CAPM(#6) & DDM(#7) approaches)
Please show how you arrived at the answers as well

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4.1 Ratings (611 Votes)

a Bond Coupon Rate 8 payable semiannuallyPar Value 1000 Sale Price 108029 and Current Maturity 12 years Let the YTM be 2r SemiAnnual Coupon 05 x 008 x 1000 40 Therefore 108029 See Answer

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Resources Corporation is estimating its WACC. Its target capitalstructure is 40% debt, 10% preferred stock, and 50% common equity.Its bonds have an 8% coupon rate, paid semi-annually, a currentmaturity of 12 years, and sell for $1,080.29. The firm could sell,at par, $100 preferred stock which pays a 6.75% annual dividend(assume no flotation costs). Resources’ beta is 1.6, the risk-freerate [rRF] is 3%, and the market risk premium [RPM] is 5%.Resources is a constant-growth firm which just paid a dividend of$2.40, the common stock currently sells for $35.72 per share [Po],and has a growth rate of 4%. The firm’s marginal tax rate is 40percent.a) What is Resources’ component cost of debt [Kd]?Calculate Kd for the semi-annual coupon bondb) What is Resources’ cost of preferred stock[Kp]?c) What is Resources’ cost of common stock (Ks) usingthe CAPM approach?d) What is the firm’s cost of common stock (Ks) usingthe DDM approach?e) What is Resources’ WACC? (Use the average Ks derivedunder the CAPM(#6) & DDM(#7) approaches)Please show how you arrived at the answers as well