An analyst has collected the following information regarding Christopher Co.: â€
ID: 2698163 • Letter: A
Question
An analyst has collected the following information regarding Christopher Co.:
• The company’s capital structure is 60% equity and 40% debt.
• 10-year bond is sold at 1325.20 with 14% coupon rate.
• The company’s year-end dividend is forecasted to be $1.50 a share.
• The company expects that its dividend will grow at a constant rate of 7 % a year.
• The company’s stock price is $25.
• The company’s tax rate is 40%.
• The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10% of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, What is the company's WACC?
Explanation / Answer
Face value = Maturity Vlue = $1000=FV
Copuon 10%semiannual. So PMT = 10%*1000/2 = 50 per priod
YTM = Rate = 7.5%. So semiannual YTM = 7.5%/2 = 3.75%
Maturity = nper = 15 Yrs = 15*2=30 periods
SO Current Bond price PV = PV(Rate,nper,PMT,FV) = PV(3.75%,30,50,1000) =$1,222.87
Now for Bonds call price :-
YTC = Rate = 5.54%. So Semiannual YTC = 5.54%/2 = 2.77%
Call period = 5Yrs = 10 period = nper
Current Bond Price = PV=$1,222.87
SO Bond Call price = FV(Rate,nper,PMT,-PV)
= FV(2.77%,10,50,-1222.87) = $1,039.94 ..........Ans