Merrill Lynch Limited has the following information and a tax rate of 30 percent
ID: 2715207 • 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 semiannual 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:
1 Total market value for the company
2. After-tax Cost of Debt (rounded to 3 decimal places)
3. Cost of Common Stock (rounded to 3 decimal places)
4. Cost of Preferred Stock (rounded to 3 decimal places)
5. WACC (rounded to 3 decimal places)
SHOW ALL WORKINGS
Explanation / Answer
1)
Total market value = 1000 * 0.95 * 2000 + 250000 * 55 + 12000 * 110
= 16970000
2)
950 = 30 * [1-(1+r)ˆ-24]/r + 1000/(1+r)ˆ24
=>
r = 3.31%
after tax cost of debt =3.31 * 2 * (1-30%) = 4.634%
3)
cost of common stock = 4% + 1.2 * 6% = 11.2%
4)
cost of preferred stock = 6%
5)
wacc = 1900000/16970000 * 4.634% + 13750000/16970000 * 11.2% + 1320000/16970000 * 6%
= 10.06%