Hello again, hope all is well. I am currently working on a homework assignment and only have 2questions left. I completed all thecalculations step by step for question 1, but cannot seem to find my error, as neither 11.64% nor 11.82% are accurate. The other two questions I would be grateful if you can provide calculations via excel so I can follow through. I have provided the excel file I am working with.Hope you can help. Thank you!

The Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and a par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is .90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? 1) Debt: coupon rate current price term in years m YTM 11% $108 20 2 10.06% facevalue coup pmt tax rate debt bonds after tax cost of debt bonds is YTM*(1-Tax Rate) $100 $11 25% 150,000 7.55% mkt value of debt bonds is debt bond amt by current price $16,200,000 2) 320,000 zero coupon bonds: current price $16 term in years 30 m 2 YTM -1.56% face value coup pmt zero coupon bonds after tax cost of zero coupon bonds is YTM*(1-Tax Rate) $10 $0 320,000 -1.17% mkt value of zero coupon bonds is zero coupon bond amt by current price $5,120,000 3) Cost of Preferred Stock: shares of 9% number of PS shares/ PS amt current price $67 par value $100 dividend is par value by shares of (%) $9 cost of PS is Dividend/Current Price * Par Value 13.43% 240,000 mkt value of PS is PS amt by current price $16,080,000 te of 108.0; the ity. ce of $67, and a nd the beta of ent, and the 4) Common Stock/ Cost of Equity: number of CS shares current price beta MRP rfr 3,500,000 $53 0.9 8% 5% recall Cost of Equity is rfr + Beta * MRP 12.20% mkt value of equity is CS amt by current price $185,500,000 5) Total Value of firm is sum of Market Values: $222,900,000 6) Weights of Bonds is MV of each bond type over Total Value of firm Debt Zero Coup PS CS/Equity 0.0726783311 0.0229699417 0.0721399731 0.8322117541 1.00 Two different attempts at WACC, both wrong: 7) WACC is sum of weights by cost of capital (%) Debt Zero Coup 10.06% 0.072678331 -1.56% 0.022969942 WACC debt zero coup 7.55% -1.17% PS CS/Equity 13.43% 0.072139973 12.20% 0.832211754 WACC 11.818% ps cs/equity 13.43% 12.20% WACC 11.64% 0.072678331 0.022969942 0.072139973 0.832211754 You are given the following information for Huntington Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13. Market: 6 percent market risk premium and 4.70 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Floyd Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent per year. The expected return on the market is 13 percent, and Treasury bills are yielding 4.8 percent. The most recent stock price for Floyd is $65. a. Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) DCF method % b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) \fThe Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; th bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is .90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? 1) Debt: coupon rate current price term in years m YTM 11% $108 20 2 10.06% facevalue coup pmt tax rate debt bonds after tax cost of debt bonds is YTM*(1-Tax Rate) $100 $11 25% 150,000 7.55% mkt value of debt bonds is debt bond amt by current price $16,200,000 2) 320,000 zero coupon bonds: current price $16 term in years 30 m 2 YTM 6.20% face value coup pmt zero coupon bonds after tax cost of zero coupon bonds is YTM*(1-Tax Rate) $100 $0 320,000 4.65% mkt value of zero coupon bonds is zero coupon bond amt by current price $5,120,000 3) Cost of Preferred Stock: shares of 9% number of PS shares/ PS amt current price $67 par value $100 dividend is par value by shares of (%) $9 cost of PS is Dividend/Current Price * Par Value 13.43% mkt value of PS is PS amt by current price 240,000 $16,080,000 anding. rrent price quote of 108.0; the ears until maturity. th a current price of $67, and a price is $53, and the beta of emium is 8 percent, and the 4) Common Stock/ Cost of Equity: number of CS shares current price beta MRP rfr 3,500,000 $53 0.9 8% 5% recall Cost of Equity is rfr + Beta * MRP 12.20% mkt value of equity is CS amt by current price $185,500,000 5) Total Value of firm is sum of Market Values: $222,900,000 6) Weights of Bonds is MV of each bond type over Total Value of firm Debt Zero Coup PS CS/Equity 0.0726783311 0.0229699417 0.0721399731 0.8322117541 1.00 Two different attempts at WACC, both wrong: 7) WACC is sum of weights by cost of capital (%) Debt Zero Coup PS CS/Equity 10.06% 6.20% 13.43% 12.20% 0.072678331 0.022969942 0.072139973 0.832211754 WACC debt zero coup ps cs/equity 7.55% 4.65% 13.43% 12.20% WACC 11.996% WACC 11.78% .... This is the correct version 0.072678331 0.022969942 0.072139973 0.832211754 correct version You are given the following information for Huntington Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13. Market: 6 percent market risk premium and 4.70 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Debt Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt 35% 6,000 7% 2 ... per year 1,030 ... per bond unit 25 ... years 1,000 50 ... Coupon frequency * Term 6,180,000 ... Bond units * Price 34 ... (Face value * Coupon rate) / (Coupon frequency) 6.46% ... Yield to Maturity 4.20% ... YTM * (1 - Tax) Common Stock Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 390,000 57 4.70% 6.00% 1.13 22,230,000 ... Stock units * Price 11.48% ... Risk free rate + (beta * Market risk premium) WACC Source of Capital Debt Equity WACC Market Value 6,180,000 22,230,000 Weight 21.75% 78.25% Cost Weight * Cost 4.20% 0.91% 11.48% 8.98% 9.90% Floyd Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent per year. The expected return on the market is 13 percent, and Treasury bills are yielding 4.8 percent. The most recent stock price for Floyd is $65. a. Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) DCF method % b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) The Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and a par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is .90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? 1) Debt: coupon rate current price term in years m YTM 11% $108 20 2 10.06% facevalue coup pmt tax rate debt bonds after tax cost of debt bonds is YTM*(1-Tax Rate) $100 $11 25% 150,000 7.55% mkt value of debt bonds is debt bond amt by current price $16,200,000 2) 320,000 zero coupon bonds: current price $16 term in years 30 m 2 YTM 6.20% face value coup pmt zero coupon bonds after tax cost of zero coupon bonds is YTM*(1-Tax Rate) $100 $0 320,000 4.65% mkt value of zero coupon bonds is zero coupon bond amt by current price $5,120,000 3) Cost of Preferred Stock: shares of 9% number of PS shares/ PS amt current price $67 par value $100 dividend is par value by shares of (%) $9 cost of PS is Dividend/Current Price * Par Value 13.43% mkt value of PS is PS amt by current price 240,000 $16,080,000 te of 108.0; the ity. ce of $67, and a nd the beta of ent, and the 4) Common Stock/ Cost of Equity: number of CS shares current price beta MRP rfr 3,500,000 $53 0.9 8% 5% recall Cost of Equity is rfr + Beta * MRP 12.20% mkt value of equity is CS amt by current price $185,500,000 5) Total Value of firm is sum of Market Values: $222,900,000 6) Weights of Bonds is MV of each bond type over Total Value of firm Debt Zero Coup PS CS/Equity 0.0726783311 0.0229699417 0.0721399731 0.8322117541 1.00 Two different attempts at WACC, both wrong: 7) WACC is sum of weights by cost of capital (%) Debt Zero Coup PS CS/Equity 10.06% 6.20% 13.43% 12.20% 0.072678331 0.022969942 0.072139973 0.832211754 WACC debt zero coup ps cs/equity 7.55% 4.65% 13.43% 12.20% WACC 11.996% WACC 11.78% .... This is the correct version 0.072678331 0.022969942 0.072139973 0.832211754 correct version You are given the following information for Huntington Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13. Market: 6 percent market risk premium and 4.70 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Debt Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt 35% 6,000 7% 2 ... per year 1,030 ... per bond unit 25 ... years 1,000 50 ... Coupon frequency * Term 6,180,000 ... Bond units * Price 34 ... (Face value * Coupon rate) / (Coupon frequency) 6.46% ... Yield to Maturity 4.20% ... YTM * (1 - Tax) Common Stock Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 390,000 57 4.70% 6.00% 1.13 22,230,000 ... Stock units * Price 11.48% ... Risk free rate + (beta * Market risk premium) WACC Source of Capital Debt Equity WACC Market Value 6,180,000 22,230,000 Weight 21.75% 78.25% Cost Weight * Cost 4.20% 0.91% 11.48% 8.98% 9.90% Floyd Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent per year. The expected return on the market is 13 percent, and Treasury bills are yielding 4.8 percent. The most recent stock price for Floyd is $65. a. Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) DCF method % b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of Equity Using SML Market return Risk free rate Beta Market risk premium Cost of Equity 13% 4.80% 1.30 8.20% ... Market return - Risk free rate 15.46% ... Risk free rate + (beta * Market risk premium) Cost of Equity Using DDM Current Dividend D(1) Dividend growth rate Current price Cost of Equity 0.3 0.31 ... Dividend next year 4% 65 4.48% ... {D(1) / Price} - Dividend growth rate P=D(1) / {Cost of Equity - Dividend growth rate} P * {Cost of Equity - Dividend growth rate} = D(1) Cost of Equity = {D(1) / P} + Dividend growth rate end of $.30, and the urn on the market is 13 ck price for Floyd is wer to 2 decimal wer to 2 decimal t risk premium) \fThe Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and a par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is . 90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? 1) Debt: coupon rate current price term in years m YTM 11% $108 20 2 10.0635% facevalue annual coup pmt tax rate debt bonds $100 $11 25% 150,000 10.0635% after tax cost of debt bonds is YTM*(1-Tax Rate) 7.55% mkt value of debt bonds is debt bond amt by current price $16,200,000 2) 320,000 zero coupon bonds: current price $16 term in years 30 m 2 YTM 6.20% face value coup pmt zero coupon bonds after tax cost of zero coupon bonds is YTM*(1-Tax Rate) $100 $0 320,000 4.65% mkt value of zero coupon bonds is zero coupon bond amt by current price $5,120,000 3) Cost of Preferred Stock: shares of 9% number of PS shares/ PS amt current price $67 par value $100 dividend is par value by shares of (%) $9 cost of PS is Dividend/Current Price * Par Value 13.43% mkt value of PS is PS amt by current price 240,000 $16,080,000 quote of 108.0; the bonds aturity. price of $67, and a par value 3, and the beta of the stock is . percent, and the risk-free rate 4) Common Stock/ Cost of Equity: number of CS shares current price beta MRP rfr 3,500,000 $53 0.9 8% 5% recall Cost of Equity is rfr + Beta * MRP 12.20% mkt value of equity is CS amt by current price $185,500,000 5) Total Value of firm is sum of Market Values: $222,900,000 6) Weights of Bonds is MV of each bond type over Total Value of firm Debt Zero Coup PS CS/Equity 0.0726783311 0.0229699417 0.0721399731 0.8322117541 1.00 Two different attempts at WACC, both wrong: 7) WACC is sum of weights by cost of capital (%) 0.051282051 Debt Zero Coup PS CS/Equity 10.06% 6.20% 13.43% 12.20% 0.072678331 0.022969942 0.072139973 0.832211754 WACC debt zero coup ps cs/equity WACC 11.996% WACC .... This is the correct version 7.55% 4.65% 13.43% 12.20% 0.072678331 0.022969942 0.072139973 0.832211754 11.78% . This is the correct version Solution to Question You Asked The Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and a par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is . 90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? Debt Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt Zero Coupon Bond Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt ... Using exactly the same logic as applied in question 2 25% 150,000 11% 2 ... per year 108 ... per bond unit 20 ... years 100 40 ... Coupon frequency * Term 16,200,000 ... Bond units * Price 5.50 ... (Face value * Coupon rate) / (Coupon frequency) 10.06% ... Yield to Maturity 7.55% ... YTM * (1 - Tax) ... Using exactly the same logic as applied in question 2 25% 320,000 0% 2 ... per year 16 ... per bond unit 30 ... years 100 60 ... Coupon frequency * Term 5,120,000 ... Bond units * Price - ... (Face value * Coupon rate) / (Coupon frequency) 6.20% ... Yield to Maturity 4.65% ... YTM * (1 - Tax) Preference Share Share units Coupon rate Current price 240000 9% 67 Par value Annual coupon amount Coupon frequency Coupon amount Cost of Pref. Shares Market value of Pref. shares Equity Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 100 9 2 4.5 13.43% ... Dividend / Price 16,080,000 ... Using exactly the same logic as in question 3 3,500,000 53 5.00% 8.00% 0.90 185,500,000 ... Stock units * Price 12.20% ... Risk free rate + (beta * Market risk premium) WACC Source of Capital Debt Zero coupon bond Preference shares Equity WACC Market Value 16,200,000 5,120,000 16,080,000 185,500,000 Weight 7.27% 2.30% 7.21% 83.22% Cost Weight * Cost 7.55% 0.55% 4.65% 0.11% 13.43% 0.97% 12.20% 10.15% 11.78% Solution to Question In HW8.png File 8.0; the bonds , and a par value ta of the stock is . the risk-free rate The Saunders Investment Bank has the following financing outstanding. Debt: 130,000 bonds with a coupon rate of 9 percent and a current price quote of 112.0; the bo 20 years to maturity. 300,000 zero coupon bonds with a price quote of 17 and 30 years until maturity. Preferred stock: 220,000 shares of 7 percent preferred stock with a current price of $69, and a pa of $100. Common stock: 3,300,000 shares of common stock; the current price is $55, and the beta of the 1.00. Market: The corporate tax rate is 35 percent, the market risk premium is 6 percent, and the riskis 3 percent. What is the WACC for the company? Debt / (Coupon frequency) Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt Zero Coupon Bond / (Coupon frequency) Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt ... Using exactly the same logic as applied in question 2 35% 130,000 9% 2 ... per year 1,120 ... per bond unit 20 ... years 1,000 40 ... Coupon frequency * Term 145,600,000 ... Bond units * Price 45.00 ... (Face value * Coupon rate) / (Coupo 7.80% ... Yield to Maturity 5.07% ... YTM * (1 - Tax) ... Using exactly the same logic as applied in question 2 35% 300,000 0% 2 ... per year 170 ... per bond unit 30 ... years 1,000 60 ... Coupon frequency * Term 51,000,000 ... Bond units * Price - ... (Face value * Coupon rate) / (Coupo 5.99% ... Yield to Maturity 3.90% ... YTM * (1 - Tax) Preference Share Share units Coupon rate Current price 220000 7% 69 rket risk premium) Par value Annual coupon amount Coupon frequency Coupon amount Cost of Pref. Shares Market value of Pref. shares Equity Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 100 7 1 7 10.14% ... Dividend / Price 15,180,000 ... Using exactly the same logic as in question 3 3,300,000 55 3.00% 6.00% 1.00 181,500,000 ... Stock units * Price 9.00% ... Risk free rate + (beta * Market risk p WACC Source of Capital Debt Zero coupon bond Preference shares Equity WACC Market Value 145,600,000 51,000,000 15,180,000 181,500,000 Weight 37.02% 12.97% 3.86% 46.15% Cost 5.07% 3.90% 10.14% 9.00% ng. price quote of 112.0; the bonds have ntil maturity. urrent price of $69, and a par value e is $55, and the beta of the stock is m is 6 percent, and the risk-free rate as applied in question 2 frequency * Term alue * Coupon rate) / (Coupon frequency) as applied in question 2 frequency * Term alue * Coupon rate) / (Coupon frequency) as in question 3 e rate + (beta * Market risk premium) Weight * Cost 1.88% 0.51% 0.39% 4.15% 6.93% You are given the following information for Huntington Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13. Market: 6 percent market risk premium and 4.70 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Debt Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt 35% 6,000 7% 2 ... per year 1,030 ... per bond unit 25 ... years 1,000 50 ... Coupon frequency * Term 6,180,000 ... Bond units * Price 34 ... (Face value * Coupon rate) / (Coupon frequency) 6.46% ... Yield to Maturity 4.20% ... YTM * (1 - Tax) Common Stock Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 390,000 57 4.70% 6.00% 1.13 22,230,000 ... Stock units * Price 11.48% ... Risk free rate + (beta * Market risk premium) WACC Source of Capital Debt Equity WACC Market Value 6,180,000 22,230,000 Weight 21.75% 78.25% Cost Weight * Cost 4.20% 0.91% 11.48% 8.98% 9.90% Floyd Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent per year. The expected return on the market is 13 percent, and Treasury bills are yielding 4.8 percent. The most recent stock price for Floyd is $65. a. Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) DCF method % b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of Equity Using SML Market return Risk free rate Beta Market risk premium Cost of Equity 13% 4.80% 1.30 8.20% ... Market return - Risk free rate 15.46% ... Risk free rate + (beta * Market risk premium) Cost of Equity Using DDM Current Dividend D(1) Dividend growth rate Current price Cost of Equity 0.3 0.31 ... Dividend next year 4% 65 4.48% ... {D(1) / Price} - Dividend growth rate P=D(1) / {Cost of Equity - Dividend growth rate} P * {Cost of Equity - Dividend growth rate} = D(1) Cost of Equity = {D(1) / P} + Dividend growth rate end of $.30, and the urn on the market is 13 ck price for Floyd is wer to 2 decimal wer to 2 decimal t risk premium) MVD1 MVD2 MVP MVE 54000000 46200000 10780000 157500000 Total Market Value 268480000 CAPM Cost of Debt 0.114 11.40% 7.237 7.2370% After tax Cost of Debt 4.70405% After tax Zero Coupon 5.2704 5.2704% 0.0342576 3.42576% Required Rate of Return on Preferred Stock 0.07792 7.7922% WACC 0.009461364 0.0058950429 0.0045773242 0.0457118864 Total 0.0656456175 Solution: N PV 40 PMT -1080 FV 40 I/Y 1000 3.6185 7.237 I reviewed your spreadsheet and you mi Preferred Stock when calculating the tot MVP 10780000 Total Market Value 268480000 10780000/268480000 = 4.02% then you should have multiplied it by the Required This would give you 7.79%*4.02% = .000 MVE 157500000 Total Market Value 268480000 15750000 Rate of Return on Preferred Stock, which the CAPM rate of 11.4%. This would give you 11.4%*58.66% = .06 Then you new values for WACC would be N PV 60 PMT 210 FV 0 0.009461364 0.005895043 0.003128 Total 0.085361621 I/Y 1000 2.6352 5.2704 preadsheet and you mixed up the rates for the CAPM and Required Rate of Return on when calculating the total WACC. ue 268480000 0000 = 4.02% then you multiplied it by the CAPM rate of 11.4%. This is not correct. You tiplied it by the Required Rate of Return on Preferred Stock, which is 7.79%. ou 7.79%*4.02% = .0003128725 ue 268480000 157500000/268480000 = 58.66% then you multiplied it by the Required n Preferred Stock, which is 7.79%. This is not correct. You should have multiplied it by 11.4%. ou 11.4%*58.66% = .06687649 lues for WACC would be: 0.005895043 0.003128725 0.06687649 Which would give you - 1 The Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and a par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is . 90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? 1) Debt: coupon rate current price term in years m YTM 11% $108 20 2 10.0635% facevalue annual coup pmt tax rate debt bonds $100 $11 25% 150,000 10.0635% after tax cost of debt bonds is YTM*(1-Tax Rate) 7.55% mkt value of debt bonds is debt bond amt by current price $16,200,000 2) 320,000 zero coupon bonds: current price $16 term in years 30 m 2 YTM 6.20% face value coup pmt zero coupon bonds after tax cost of zero coupon bonds is YTM*(1-Tax Rate) $100 $0 320,000 4.65% mkt value of zero coupon bonds is zero coupon bond amt by current price $5,120,000 3) Cost of Preferred Stock: shares of 9% number of PS shares/ PS amt current price $67 par value $100 dividend is par value by shares of (%) $9 cost of PS is Dividend/Current Price * Par Value 13.43% mkt value of PS is PS amt by current price 240,000 $16,080,000 quote of 108.0; the bonds aturity. price of $67, and a par value 3, and the beta of the stock is . percent, and the risk-free rate 4) Common Stock/ Cost of Equity: number of CS shares current price beta MRP rfr 3,500,000 $53 0.9 8% 5% recall Cost of Equity is rfr + Beta * MRP 12.20% mkt value of equity is CS amt by current price $185,500,000 5) Total Value of firm is sum of Market Values: $222,900,000 6) Weights of Bonds is MV of each bond type over Total Value of firm Debt Zero Coup PS CS/Equity 0.0726783311 0.0229699417 0.0721399731 0.8322117541 1.00 Two different attempts at WACC, both wrong: 7) WACC is sum of weights by cost of capital (%) 0.051282051 Debt Zero Coup PS CS/Equity 10.06% 6.20% 13.43% 12.20% 0.072678331 0.022969942 0.072139973 0.832211754 WACC debt zero coup ps cs/equity WACC 11.996% WACC .... This is the correct version 7.55% 4.65% 13.43% 12.20% 0.072678331 0.022969942 0.072139973 0.832211754 11.78% . This is the correct version Solution to Question You Asked The Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16.0 and 30 years until maturity. Preferred stock: 240,000 shares of 9 percent preferred stock with a current price of $67, and a par value of $100. Common stock: 3,500,000 shares of common stock; the current price is $53, and the beta of the stock is . 90. Market: The corporate tax rate is 25 percent, the market risk premium is 8 percent, and the risk-free rate is 5 percent. What is the WACC for the company? Debt Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt Zero Coupon Bond Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt ... Using exactly the same logic as applied in question 2 25% 150,000 11% 2 ... per year 1,080 ... per bond unit 20 ... years 1,000 40 ... Coupon frequency * Term 162,000,000 ... Bond units * Price 55.00 ... (Face value * Coupon rate) / (Coupon frequency) 10.06% ... Yield to Maturity 7.55% ... YTM * (1 - Tax) ... Using exactly the same logic as applied in question 2 25% 320,000 0% 2 ... per year 160 ... per bond unit 30 ... years 1,000 60 ... Coupon frequency * Term 51,200,000 ... Bond units * Price - ... (Face value * Coupon rate) / (Coupon frequency) 6.20% ... Yield to Maturity 4.65% ... YTM * (1 - Tax) Preference Share Share units Coupon rate Current price 240000 9% 67 Par value Annual coupon amount Coupon frequency Coupon amount Cost of Pref. Shares Market value of Pref. shares Equity Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 100 9 2 4.5 13.43% ... Dividend / Price 16,080,000 ... Using exactly the same logic as in question 3 3,500,000 53 5.00% 8.00% 0.90 185,500,000 ... Stock units * Price 12.20% ... Risk free rate + (beta * Market risk premium) WACC Source of Capital Debt Zero coupon bond Preference shares Equity WACC Market Value 162,000,000 51,200,000 16,080,000 185,500,000 Weight 39.06% 12.34% 3.88% 44.72% Cost Weight * Cost 7.55% 2.95% 4.65% 0.57% 13.43% 0.52% 12.20% 5.46% 9.50% Solution to Question In HW8.png File 8.0; the bonds , and a par value ta of the stock is . the risk-free rate The Saunders Investment Bank has the following financing outstanding. Debt: 130,000 bonds with a coupon rate of 9 percent and a current price quote of 112.0; the bo 20 years to maturity. 300,000 zero coupon bonds with a price quote of 17 and 30 years until maturity. Preferred stock: 220,000 shares of 7 percent preferred stock with a current price of $69, and a pa of $100. Common stock: 3,300,000 shares of common stock; the current price is $55, and the beta of the 1.00. Market: The corporate tax rate is 35 percent, the market risk premium is 6 percent, and the riskis 3 percent. What is the WACC for the company? Debt / (Coupon frequency) Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt Zero Coupon Bond / (Coupon frequency) Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt ... Using exactly the same logic as applied in question 2 35% 130,000 9% 2 ... per year 1,120 ... per bond unit 20 ... years 1,000 40 ... Coupon frequency * Term 145,600,000 ... Bond units * Price 45.00 ... (Face value * Coupon rate) / (Coupo 7.80% ... Yield to Maturity 5.07% ... YTM * (1 - Tax) ... Using exactly the same logic as applied in question 2 35% 300,000 0% 2 ... per year 170 ... per bond unit 30 ... years 1,000 60 ... Coupon frequency * Term 51,000,000 ... Bond units * Price - ... (Face value * Coupon rate) / (Coupo 5.99% ... Yield to Maturity 3.90% ... YTM * (1 - Tax) Preference Share Share units Coupon rate Current price 220000 7% 69 rket risk premium) Par value Annual coupon amount Coupon frequency Coupon amount Cost of Pref. Shares Market value of Pref. shares Equity Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 100 7 1 7 10.14% ... Dividend / Price 15,180,000 ... Using exactly the same logic as in question 3 3,300,000 55 3.00% 6.00% 1.00 181,500,000 ... Stock units * Price 9.00% ... Risk free rate + (beta * Market risk p WACC Source of Capital Debt Zero coupon bond Preference shares Equity WACC Market Value 145,600,000 51,000,000 15,180,000 181,500,000 Weight 37.02% 12.97% 3.86% 46.15% Cost 5.07% 3.90% 10.14% 9.00% ng. price quote of 112.0; the bonds have ntil maturity. urrent price of $69, and a par value e is $55, and the beta of the stock is m is 6 percent, and the risk-free rate as applied in question 2 frequency * Term alue * Coupon rate) / (Coupon frequency) as applied in question 2 frequency * Term alue * Coupon rate) / (Coupon frequency) as in question 3 e rate + (beta * Market risk premium) Weight * Cost 1.88% 0.51% 0.39% 4.15% 6.93% You are given the following information for Huntington Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13. Market: 6 percent market risk premium and 4.70 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Debt Tax Bond Units Coupon rate Coupon frequency Price Term Face value Number of payments Market value of debt Coupon payment YTM After tax cost of debt 35% 6,000 7% 2 ... per year 1,030 ... per bond unit 25 ... years 1,000 50 ... Coupon frequency * Term 6,180,000 ... Bond units * Price 34 ... (Face value * Coupon rate) / (Coupon frequency) 6.46% ... Yield to Maturity 4.20% ... YTM * (1 - Tax) Common Stock Stock units Price Risk free rate Market risk premium Beta Market value of equity Cost of Equity 390,000 57 4.70% 6.00% 1.13 22,230,000 ... Stock units * Price 11.48% ... Risk free rate + (beta * Market risk premium) WACC Source of Capital Debt Equity WACC Market Value 6,180,000 22,230,000 Weight 21.75% 78.25% Cost Weight * Cost 4.20% 0.91% 11.48% 8.98% 9.90% Floyd Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent per year. The expected return on the market is 13 percent, and Treasury bills are yielding 4.8 percent. The most recent stock price for Floyd is $65. a. Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) DCF method % b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of Equity Using SML Market return Risk free rate Beta Market risk premium Cost of Equity 13% 4.80% 1.30 8.20% ... Market return - Risk free rate 15.46% ... Risk free rate + (beta * Market risk premium) Cost of Equity Using DDM Current Dividend D(1) Dividend growth rate Current price Cost of Equity 0.3 0.31 ... Dividend next year 4% 65 4.48% ... {D(1) / Price} - Dividend growth rate P=D(1) / {Cost of Equity - Dividend growth rate} P * {Cost of Equity - Dividend growth rate} = D(1) Cost of Equity = {D(1) / P} + Dividend growth rate end of $.30, and the urn on the market is 13 ck price for Floyd is wer to 2 decimal wer to 2 decimal t risk premium)