**********HW Question 2 Only*********

Cost of Capital ABC Corp Balance Sheet on 12/31/17 (in thousand Accounts Payable Debt (896, 10yrs) Pfd Stock ($10 par, S4 dividend) Common Stock ($1 par) TOTAL LIABILITIES &OE 100 1,200 100 300 1,700 The market price of the securities are: Bonds: Sell to yield 10%. 1,200 bonds are outstanding. ABC has a tax rate of 40% Pfd Stock Constant dividend type, Price is $32. (10,000 pfd shares@ $4 dividend per share) Common The common stock has paid dividends of $1; $1.10; $1.21 and $1.33 in the last 4 years Recent dividend of $1.33 was paid this morning. This growth rate in dividends is expected to continue. The market price of the common stock is $8.80 1.Obtain the component costs of debt, pfd., and common stock. Cost of debt Bonds yield 10% to the investors. The after-tax cost of debt is 10%*(1-t)-6% Stock: Common: The price and dividends are $32 and $4. The cost of Pfd Stock is $4/$32-12.5% Dividend growth rate is 10%. The dividend next year is-1.33*(1+10%-$1.463. Cost of common stock-DPo + g-S1 .463/8.80 + 0.10-26.63% 2. Obtain the market value capital structure (and weights) of the firm. Price of Pfd is $32, and for common stock is $8.80. What is the price of the bond? Bond is selling to yield 10%. Bond is 10 year, 8% coupon; N-10; 1-10, PMT-80, FV-1000, PV-$877.11 Shares Outstandin Price Value Bonds Pfd stock Common 1,200 10,000 300,000 $877.11 32.00 8.80 $1,052,532 320,000 2,640,000 $4,012,532 0.2623 0.0798 0.6579 Total-> 3. Based on market value capital structure, what is the WACC? Weight(from #2) 0.2623 0.0798 0.6579 Costs (from #1) 6.00% 12.50% 26.63% Product 0.0157 Bonds Pfd stock 0.0099 0.1752 20.09% 4.What is the WACC, based on book value capital structure? Costs Bonds Pfd stock Common Weight 0.75 0.0625 0.1875 6.00% 12.50% 26 .63% WACC -> 0.0450 0.0078 0.0499 10.27% value weights have a choice, use market value weights rather tha 5.Real world complication arise with floatation cost. Debt: New bonds have a floatation cost of 11.7% of the market price. ABC's Net Price when issuing a new bond is $ 774.49- 877.11 *(1-.117)). The cost of debt, N-10, PV--774.49, PMT = 1,000. I=rD=11.99%-12%. After-tax cost of debt 12%"(1-t)=7.20% Floatation cost is $5/share. Net price is $32. $5-$27. Cost of Pfd-$ 4627-14.81% 80, FV Pid: Common: Floatation cost is 8% of the market price. Net price-$8.80*(1-08)-$8.10. The cost of WACC including floatation costs and market value weight is 21.54%. HW: common stock is-D/Po + g-28.07%. 1. Bond price S 850; Pfd price $ 35, and Stock Price $12. Based on these market prices and the number of shares shown in #2 above, compute the market value weights. 2, Floatation costs. Bond 6%, Pfd stock 996, and common stock 0%. Compute the cost of bonds and pfd stock similar to #5 above, using the floatation costs. New common stock has a -1.2, F -4%, Market risk premium-6% Compute the component costs inclusive of floatation. Using the market value weights from previous, what is the WACC of the firm (similar to #3 above)