Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds w
ID: 2679780 • Letter: P
Question
Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?Explanation / Answer
Bonds 80,000,000 Cost .0675 *(1-.38)= .04185 Preferred 39,750,000 Cost 100*.07 /53= .132075 Common 2,500,000* 42= 105,000,000 Cost 2.8 +1.34 (11.2-2.8)= .14056 Total capital 224,750,000 WACC 80,000,000/224,750,000 * .04185 = 0.01490 39,750,000/224,750,000 * .132075= 0.02336 105,000,000/224,750,000 * .14056= 0.06567 Total WACC= 0.10393= 10.393%