Question
Not sure how the present value (PV) or payment (PMT) was computed The following information has been published for Brainwacker manufacturing corp. as of March
Not sure how the present value (PV) or payment (PMT) was computed
The following information has been published for Brainwacker manufacturing corp. as of March 31, 2016:
a.Loan: The company states that it currently has a newly issued $10 million bank loan at a rate of 8%.
b.Debt: The firm has 8 years remaining on 10% 20-year bond with a face of $50 million and a yield to maturity of 7.45%.
c.Preferred Stock: The companys preferred stock sells for $88 per share and pays an annual dividend of $11 per share. There are 1million shares outstanding.
d.Common Equity: The companys common stock sells for $56 per share and is expected to pay a dividend of $4 per share by the end of this year (i.e. D1=$4.00). The dividend is expected to grow at a constant rate of 7% a year. The yield on Treasury Bills is 5.1% while the market risk premium is believed to be 6%. Jo-Jos is an aggressive stock with a Beta of 1.5. There are 8 million shares outstanding.
e.The companys tax rate is 35%
Compute the cost of capital for each component and the Weighted Average Cost of Capital (WACC). Show all work.
Weights: Bank Loan: 1Omillion (given) Bond: 50,000,000 Face value, therefore 50,000 bonds of 1,000 FV N.8, i#7.45, PMT-100, PV_-1,149.65 Market Value 50,000 x 1149.65 = 57.482.402.70 57.5million Preferred: Mkt.Val. = price x #outstanding 88 x 1mil. 88million Common: MkLVal.-price x #outstanding-56 x 8mil. = 448million Total Mkt Value of the Firm-10+57.5+88+448 603.5 Component Costs: 08 (given) Loan (1-tax rate) rbond .0745 (YTM) Bond (1-tax rate) Po 88 stock-rf + ?(rm-rf) rstock =5.1+ (1.5)(6) =14.1% =1410 or +.07 1414 WACC#10 (1-35)(.08) + 57.5 (1-35)(0745)+88 (.1250)+ 448 (.1410) 603.5 603.5 603.5 603.5 WACC .0009-.0046 + .0 182 + . 1047 = . 1284 = 12.84Step by Step Solution
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