Cost of Debt: 80 year bonds Current price 101.5% of par value 7.6% coupon Rate s
ID: 2759868 • Letter: C
Question
Cost of Debt: 80 year bonds Current price 101.5% of par value 7.6% coupon Rate semi Anuual Bond 12 years to maturity Tax Rate:40% What is the Cost of Debt? Preferred Stock Dividend $7.50 Current Price $60.00 What it the Coil of Preferred? Equity Risk Free Rate 6.50% Market Risk Premium 6.25% Stock Beta 0.7 What is the Cost of Equity? Debt/Equity 10,000 Bonds Outstanding Selling @ 101.5% of par value 43,000 preferred Stock @ $40.00 per share What is the WACC? Given the WACC calculate the NPV for the following capital budgeting decision Investment is: $300,000 Cash Flows 1st Year -55,000 2nd Year 65,000 3nd Year 75,000 4th Year 85,000 5th Year 150,000 NPV is Decision(Circle One) Calculate PaybackExplanation / Answer
You've already have calculated first 3 questions, so I'm answering next 2 questions.
(1) WACC
Total Bonds = 10,000 x $1,000 x (101.5 / 100) = $10,150,000
Total preferred stock = 43,000 x $60 = $2,580,000
Total equity = 300,000 x $40 = $12,000,000
Total capital = $(10,150,000 + 2,580,000 + 12,000,000) = $24,730,000
% of Debt = 10,150,000 / 24,730,000 = 41.04%
% of preferred stock = 2,580,000 / 24,730,000 = 10.43%
% of equity = 12,000,000 / 24,730,000 = 48.52%
WACC = % of debt x cost of debt + % of preferred stock x Cost of preferred stock + % of equity x Cost of equity
= 41.04% x 4.4455% + 10.43% x 12.5% + 48.52% x 10.81%
= 1.83% + 1.30% + 5.25%
= 8.38%
(2) NPV
Since NPV is negative, decision rule is: Reject.
NOTE: First 2 questions are answered.
Year Cash Flow Discount Factor @8.38% Discounted cash flow (A) (B) (A) x (B) 0 -3,00,000 1.0000 -3,00,000 1 -55,000 0.9227 -50,747 2 65,000 0.8513 55,337 3 75,000 0.7855 58,913 4 85,000 0.7248 61,606 5 1,50,000 0.6687 1,00,310 NPV ($) = -74,581