Cooper has one type of common stocks and one type of bond outstanding. The total
ID: 2708454 • Letter: C
Question
Cooper has one type of common stocks and one type of bond outstanding. The total book value for the common stocks is $10M and the book value per share is $2. The common stock just paid a dividend of $1. The dividend is expected to grow at 5% for the next three years, and it will then slow down to 2% forever. The bond has a total face value of $50 million, with a coupon rate of 15% (coupons are paid semi-annually), a maturity of 8 years, and YTM of 11%. The expected market premium is 12% and the current risk free rate is 3%. Cooper equity has a beta of 1.2 and the company pays a 35% tax rate. What is company
Explanation / Answer
Cost of Common Stock = Rf + Market Riisk Premium* beta
Cost of Common Stock = 3 + 12*1.2
Cost of Common Stock = 17.40%
Cost of after tax debt = 11*0.65 = 7.15%
Price per common stock = 1*1.05/1.174 + 1*1.05^2/1.174^2 + 1*1.05^3/1.174^3 + (1*(1.05^3)*1.02/(0.174-0.02))/1.174^3 = 7.15
Market value of Capital Structure
Long term debt = 3750000PVIFA(5.5%,16) + 50000000*PVIF(5.5%,16) = $ 60,462,162
Common Stock = 7.15 * 5000000 = 35,750,000
Total Market value = $ 60,462,162 + 35,750,000 = 96,212,162
Weight of Long term debt = 60,462,162/96,212,162= 0.6284 or 62.84%
WACC = Cost of Common Stock*Weight of Common Stock + Cost of after tax debt* Weight of Long term debt
WACC = 17.40*37.16% + 7.15*62.84%
WACC = 10.96%
Answer: