Organic Produce Corporation has 9.2 million shares of common stock outstanding,
ID: 2646933 • Letter: O
Question
Organic Produce Corporation has 9.2 million shares of common stock outstanding, 670,000 shares of 7.2 percent preferred stock outstanding, and 192,000 of 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.70 per share and has a beta of 1.37, the preferred stock currently sells for $106.30 per share, and the bonds have 17 years to maturity and sell for 87.5 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 5.6 percent, and the firm
Explanation / Answer
What is the firm's market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)
Market Value of Common Stock = 9.2Milion * 65.70 = $ 604.44 Million
Market value of Preferred Stock = 0.67 Miillion * 106.30 = $ 71.221 Million
Market Value of Bond = 0.192 Million * 875 = $ 168 Million
Total Market Value = $843.661 Million
Market value Weight of Common Stock = 604.44/843.661 = 0.7165
Market value Weight of Preferred Stock = 71.221/843.661 = 0.0844
Market value Weight of Debt = 168/843.661 = 0.1991
What is the firm's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
1) Cost of equity = Rf + (Rm-Rf)*Beta
Cost of equity = 5.6 + 6.9*1.37
Cost of equity = 15.05%
2) Cost of Preferred Stock = 72/106.30
Cost of Preferred Stock = 6.77%
3) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Before Tax Cost of Debt = rate(34,42,-875,1000) * 2
Before Tax Cost of Debt = 9.94 %
After Tax Cost of Debt = 9.94*(1-38%)
After Tax Cost of Debt = 6.16%
Answer
If the firm is evaluating a new investment project that has the same risk as the firm
Market value weight of debt 0.1991 Market value weight of preferred stock 0.0844 Market value weight of equity 0.7165