Merrill Lynch Limited has the following information and a tax rate of 30 percent
ID: 2713846 • Letter: M
Question
Merrill Lynch Limited has the following information and a tax rate of 30 percent. .
Debt
2,000, 6 percent coupon bonds outstanding, $1,000 par value, 12 years
to maturity, selling for 95 percent of par, the bonds make semi-annual
payments
Common stock
250,000 shares outstanding, selling for $55 per share; the beta is 1.20
Preferred stock
12,000 shares of 6 percent preferred stock outstanding, currently selling
for $110 per share
Market
6 percent market risk premium and 4 percent risk-free rate
Determine the company’s WACC by computing the following:
Total Market value for the company. [no units and points] (4 points)
After-tax Cost of Debt. (Rounded to 3 decimal places) (2 points)
Cost of Common Stock (Rounded to 3 decimal places) (2 points)
Cost of Preferred Stock (Rounded to 3 decimal places) (2 points)
WACC (Rounded to 3 decimal places) (3 points)
Debt
2,000, 6 percent coupon bonds outstanding, $1,000 par value, 12 years
to maturity, selling for 95 percent of par, the bonds make semi-annual
payments
Common stock
250,000 shares outstanding, selling for $55 per share; the beta is 1.20
Preferred stock
12,000 shares of 6 percent preferred stock outstanding, currently selling
for $110 per share
Market
6 percent market risk premium and 4 percent risk-free rate
Explanation / Answer
Marker value if debt is 950×2000 =1.9 million
Markrt value if equity is 250,000 × 55 = 13.75 million
Market value of prefered stock is 12,000 × 110 = 1.32 million
Total market value of company is 1.9 + 13.75 +1.32 =16.97 million.
Yield of the debt is 6.61%, so post tax cost of debt is 6.61%×(1-0.3) = 4.63%.
Cost of common equity us Rf + beta×Rm = 4% + 1.2×6% = 11.2%
Cost of prefered stock is D/price = 6/110 = 5.45%
WACC is % equity ×cost if ewuity + % debt× cost of debt + % preference stock×cost of preference stock
=0.8103×11.2% +0.1120×4.63% +0.0778×5.45% =9.075 + 0.5186 + 0.424 = 10.017%