Refer to the Excel workbook titled ?WACC_Project_FinancialStatements.xlsx? for financial information and additional information in the bulleted list
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Refer to the Excel workbook titled ?WACC_Project_FinancialStatements.xlsx? for financial information and additional information in the bulleted list below
- The firm has 25 million shares of common stock outstanding. The beta is 1.4.
- The firm plans to increase dividends by 25% each year for the next 2 years and then by 3% per year after that.
- The expected return on the market portfolio is 13% and the risk-free rate is 3.5%.
- The firm has three bond issues outstanding. All bonds make annual coupon payments.
- Bond 1 is a 5% coupon bond with face value of $1000. The YTM is 4% and the bonds mature in 14 years. There are 10,000 of these bonds.
- Bond 2 is a zero coupon bond with face value of $5000. The YTM is 3% and the bonds mature in 22 years. There are 4,000 of these bonds.
- Bond 3 is a 7% coupon bond with face value of $1000. The YTM is 5.5% and the bonds mature in 7 years. There are 65,000 of these bonds.
- The firm has 250,000 shares of preferred stock outstanding that pay a dividend of $5 per share annually. The current price of a share of preferred stock is $65.
- The company?s average tax rate is 30%.
- Find WACC using market values:
- Find the cost of equity using CAPM.
- Find the stock price using the dividend growth model.
- Find the cost of debt by taking a weighted average of the bonds? YTMs:
- Find bond value for each bond.
- Find total value for each of the bond issues outstanding.
- Use i. and ii. to find the weights and the YTMs to find the weighted average YTM.
- Find the total market value of equity using your answer to b. and the number of shares outstanding.
- Find the cost of preferred stock.
- Find Wd, We, and Wp using market values.
- Plug the numbers into the WACC formula to get the market value-based WACC.
- Find WACC using book values and ignoring the preferred stock:
- Find the cost of equity using CAPM (already did this)
- Find the weights using the most recent balance sheet.
- Use your cost of debt from #1c above.
- Plug the numbers in the WACC formula to get a book value-based WACC.
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Related Book For
Financial Reporting And Analysis
ISBN: 9781260247848
8th Edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
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