Homework Assignment 5: WACC and Capital Structure Milwaukee Telecom (MT) has approached you for advice on its capital structure. You have collected the following data related to its capital structure: The company has $120 million of 20-year bonds (paying interest semiannually) with a stated s a BB credit rating. Firms with similar credit ratings coupon rate of 8.2 percent p.a. The pay a premium of 245 basis points above the yield on U.S. Treasury bonds that are currently yielding 3.05 percent p.a. The firm faces a marginal tax rate of 31 percent . The company has $120 million of 5-year convertible bonds (paying interest semiannually) with a stated coupon rate of 3.0 percent p.a. Current market yields on 5-year straight bonds for companies with BB credit ratings is 4.2 percent p.a. The convertible debt is currently valued at $132 million. The company reports off-balance sheet operating leases outstanding with obligations averaging $14 million per year over the next 10 years . There are 600,000 shares of $100 par value preferred stock with a fixed dividend of $6.75 per share. If publicly traded, the stock would likely be valued at $116 per share . The total common equity (book value) is $450 million, with 50 million shares of common stock outstanding. The firm's stock is not publicly traded but data from comparable firms showed an average beta of 1.31; these firms had an average debt-equity ratio of 0.35 and average tax rate of 28 percent. The firm believes its own cost of equity would be based on a leveraged beta based on the book value weights of the firm's straight debt and equity (i.e., disregard the operating leases, the convertible bonds, the preferred stock, and the stock options). The firm just paid a dividend (Do) of $1.75 per share of stock; future dividends are expected to grow at a rate of 3 percent per year indefinitely. The current yield on 10-year U.S. Treasury bonds is 3.05 percent, and the expected return on the S&P 500 is 9.89 percent . There are stock options outstanding on 8 million shares of common stock, they are currently valued at $3.41 per option 1. Calculate the following items (adequate documentation of your calculations is crucial): a. The firm's current after-tax cost of debt, cost of preferred stock, and cost of common equity. b. The market value of the firm's outstanding bonds, convertible debt (both debt and equity components), operating lease obligations, preferred stock, common stock, and stock options. The book value and market value weights that comprise the firm's capital structure. Include all forms of capital described above in determining the book value and market value weights. d. The current weighted average cost of capital using 1) book value weights and 2) market value weights. The calculation should include the costs of capital found in part a and the book value and market value weights found in part c Homework Assignment 5: WACC and Capital Structure Milwaukee Telecom (MT) has approached you for advice on its capital structure. You have collected the following data related to its capital structure: The company has $120 million of 20-year bonds (paying interest semiannually) with a stated s a BB credit rating. Firms with similar credit ratings coupon rate of 8.2 percent p.a. The pay a premium of 245 basis points above the yield on U.S. Treasury bonds that are currently yielding 3.05 percent p.a. The firm faces a marginal tax rate of 31 percent . The company has $120 million of 5-year convertible bonds (paying interest semiannually) with a stated coupon rate of 3.0 percent p.a. Current market yields on 5-year straight bonds for companies with BB credit ratings is 4.2 percent p.a. The convertible debt is currently valued at $132 million. The company reports off-balance sheet operating leases outstanding with obligations averaging $14 million per year over the next 10 years . There are 600,000 shares of $100 par value preferred stock with a fixed dividend of $6.75 per share. If publicly traded, the stock would likely be valued at $116 per share . The total common equity (book value) is $450 million, with 50 million shares of common stock outstanding. The firm's stock is not publicly traded but data from comparable firms showed an average beta of 1.31; these firms had an average debt-equity ratio of 0.35 and average tax rate of 28 percent. The firm believes its own cost of equity would be based on a leveraged beta based on the book value weights of the firm's straight debt and equity (i.e., disregard the operating leases, the convertible bonds, the preferred stock, and the stock options). The firm just paid a dividend (Do) of $1.75 per share of stock; future dividends are expected to grow at a rate of 3 percent per year indefinitely. The current yield on 10-year U.S. Treasury bonds is 3.05 percent, and the expected return on the S&P 500 is 9.89 percent . There are stock options outstanding on 8 million shares of common stock, they are currently valued at $3.41 per option 1. Calculate the following items (adequate documentation of your calculations is crucial): a. The firm's current after-tax cost of debt, cost of preferred stock, and cost of common equity. b. The market value of the firm's outstanding bonds, convertible debt (both debt and equity components), operating lease obligations, preferred stock, common stock, and stock options. The book value and market value weights that comprise the firm's capital structure. Include all forms of capital described above in determining the book value and market value weights. d. The current weighted average cost of capital using 1) book value weights and 2) market value weights. The calculation should include the costs of capital found in part a and the book value and market value weights found in part c
