I see different answers from Chegg for the same questions. I need the correct an
ID: 2795010 • Letter: I
Question
I see different answers from Chegg for the same questions. I need the correct answers. I need all of the points I can get. Thank you very much! A firm has a Capital Structure as follows: 1. The market value of the bonds is $2,000,000, 2. The market value of the Preferred Stock is $1,000,000. 3. Firm has 500,000 shares of common stock (equity) outstanding, selling for $20 per share The preferred stock share price is $50 and which a $4 dividend. Each share of common stock sells for $20 and pays a $1.00 dividend, which is expected to grow by 2% per year. The price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years. The firm’s tax rate is 40%. The company has $2,500,000 in sales, and expenses of $1,000,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years. 1. What is the firm’s WACC? ________________________________Chapter 13 ( to solve this question you must use the cost of preferred stock, cost of the common stock and cost of the bonds from Mini case 2-part 1) 2. What is the firm’s OCF ___________________________________Chapter 9 3. What is the NPV, using the WACC (use the answer from question 1 above), and OCF (use the answer from question 2 above)? ¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬______________________Chapter 8 4. Based on your answer to question #3, will to accept the project? _______________________________________________________Chapter 8
Explanation / Answer
Market value of bonds=2000000
Market value of preferred stock=1000000
no. of equity shares=500000
Total value V=2000000+1000000+10000000
V=13000000
WACC=E/V*re+D/V*rd+P/V*rp
Market value of equity stock=500000*20=10000000
Cost of debt, rd= (I+(F-P)/n)/0.6*P+0.4*F
where, F= Face value=1000
Coupon rate, =5%, Thus I=1000*0.05=50
n=Time to maturity=10
Current Market price=818
rd= (50+(1000-818)/10)/0.6*818+0.4*1000
=(50+18.2)/490.2+400
=68.2/890.8=0.077*100
thus rd=7.7%
Cost of euity, re= Dividend expected next year/price of the share+growth rate
=1/(20+0.02)=1/20.02=0.04995*100
thus re=5%
Cost of preference stock=Preferrred dividend/ Price of preferred stock
=4/50=0.08*100=8%
WACC=E/V*re+D/V*rd(1-T)+P/V*rp
=10000000/13000000*0.05+2000000/13000000*0.077(1-0.40)+1000000/130000000*0.08
Solving the equation,
WACC=
WACC=0.051723077*100
WACC=5.17%
0.038461538+0.007107692+0.006153846