Question
You are assigned to estimate the firms Weighted-Average-Cost-of-Capital (WACC) in order to evaluate capital budgeting opportunities. The company operates in the 20% marginal tax bracket.
You are assigned to estimate the firms Weighted-Average-Cost-of-Capital (WACC) in order to evaluate capital budgeting opportunities. The company operates in the 20% marginal tax bracket. There are three classes of long-term liabilities and equity outstanding. (1) First, the firm has 127,500 shares of common stock outstanding, which are currently trading at $88.91 per share. You will use the Gordon Growth Model to estimate a required return for the equity holders. The most recent earnings per share was $6.72. You estimate that EPS will grow at an annual rate of 3.2% into the future. (2) There is an issue of 7,000 coupon bonds outstanding that have a face value of $1,000, mature in 7 years, and pay 3.625% annual coupons. These bonds are currently trading for $977.49. (3) There is a second issue of 4,500 coupon bonds outstanding that have a face value of $1,000, mature in 18 years, and pay 5.75% annual coupons. These bonds are selling for $1,152.00. (A) What is the market value of the common stock? (B) What is the required return on the common stock? (C) What is the market value of the seven-year coupon bonds? (D) What is the before-tax required return on the seven-year coupon bonds? (E) What is the after-tax required return on the seven-year coupon bonds? (F) What is the market value of the eighteen-year coupon bonds? (G) What is the before-tax required return on the eighteen-year coupon bonds? (H) What is the after-tax required return on the eighteen-year coupon bonds? (I) What is the market value of the firms assets? (J) What is the weight on the common stock? (K) What is the weight on the seven-year coupon bonds? (L) What is the weight on the eighteen-year coupon bonds? (M) What the Weight-Average-Cost-of-Capital (WACC)?
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