Phillips Equipment has 80,000 bonds outstanding with a par value of $1000 each a
ID: 2698620 • Letter: P
Question
Phillips Equipment has 80,000 bonds outstanding with a par value of $1000 each and a quoted price of 103. The bonds carry a 7.75% coupon that is payable semiannually and mature in 25 years. The company also has 75,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding a 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38%. What is the firms weighted average cost of capital?
Explanation / Answer
1. find # of bonds, prefered stock, common stock
2. find the cost for each bonds, pref. stock, common stock
3. enter the numbers into the WACC formula
bonds = 80,000,000 42% 80,000,000/189,875,000=.42
pref. stock = 4,875,000 3%
common stock = 105,000,000 55%
total capital = 189,875,000
after tax cost of debt = 7.75%(1-.38)= 4.805%
cost of pref stock = 7%
cost of common equity = r =r(risk free) + (market return-r(risk free)*beta
2.8+(11.2-2.8)*1.34= 14.056
wacc = (% of debt)(after tax cost of debt)+(% of pref stock)(cost of pref. stock)+(% of common equity)(cost of common equity)
wacc= (42%)(4.805%)+(3%)(7%)+(55%)(14.056%)= 9.9589%
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