Problem 13-17 Preferred Stock and WACC The Saunders Investment Bank has the foll
ID: 2383433 • Letter: P
Question
Problem 13-17 Preferred Stock and WACC
The Saunders Investment Bank has the following financing outstanding.
Debt: 120,000 bonds with a coupon rate of 8 percent and a current price quote of 110.0; the bonds have 20 years to maturity. 290,000 zero coupon bonds with a price quote of 17.5 and 30 years until maturity.
Preferred stock: 210,000 shares of 6 percent preferred stock with a current price of $70, and a par value of $100.
Common stock: 3,200,000 shares of common stock; the current price is $56, and the beta of the stock is 1.05.
Market: The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.
What is the WACC for the company? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
WACC ______ %
Explanation / Answer
Cost of debt(kd)=8%
Cost of preferred Stock(kp)=6%
Cost of equity(ke)=Rf+beta*Market risk premium =4%+1.05*7%=11.35%
Market Value of Debt(D) =120000*110+290000*17.5=18275000
Market value of Preferred stock (P)=210000*70=14700000
Market value of Equity(E) =3200000*56 =179200000
Wd=D/(D+E+P) =18275000/(18275000+14700000+179200000) =0.086132
Wp=P/(D+E+P) =14700000/(18275000+14700000+179200000) =0.069282
We=E/(D+E+P) =179200000/(18275000+14700000+179200000) =0.844586
WACC =wd*kd*(1-T)+wp*kp+we*ke
WACC = 0.086132*0.08*(1-0.4)+ 0.069282*0.06+0.844586*0.1135= 0.1041518=10.41518%