In Problem 11, suppose the most recent dividend was $3.95 and the dividend growth rate is 5

Question:

In Problem 11, suppose the most recent dividend was $3.95 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company’s WACC?

Problem 11

Masterson, Inc., has 4.1 million shares of common stock outstanding. The current share price is $84, and the book value per share is $11. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, has a coupon rate of 5.1 percent, and sells for 98 percent of par. The second issue has a face value of $50 million, has a coupon rate of 5.60 percent, and sells for 108 percent of par. The first issue matures in 20 years, the second in 12 years.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...

Fantastic news! We've Found the answer you've been seeking!