You have been asked to estimate the weighted average cost of capital $($WACC$)$ for Parker Brothers Inc., a

large electronic products company. To assist with your calculations, you have been provided with the

following information.

$1.$ Bonds $--$ Parker Brothers has $25,000$ of $$1000$ face value bonds outstanding. The bonds carry a

$6\%$ coupon rate with interest paid semi$-$annually. Bonds are currently trading at $86\mathrm{.}58.$ They are

priced to provide a yield to maturity of $8\%.$ The bonds have $10$ years remaining until maturity.

$2.$ Preferred shares $--$ Parker Brothers has $2$ million preferred shares outstanding. The shares carry

a stated dividend of $$2\mathrm{.}00$ per share and have a current market price of $$22$ per share.

$3.$ Common shares $--$ Parker Brothers has $2\mathrm{.}5$ million common shares outstanding. The current

market price of the shares is $$53\mathrm{.}20$ each. The shares paid a dividend of $$2\mathrm{.}70$ per share last year

and investment analysts believe the dividends should grow at an average annual rate of $5\%$ for the

foreseeable future.

REQUIRED:

a$)$ Calculate Parker Brothers$$s weighted average cost of capital $($WACC$),$ assuming that the company

intends to issue new common shares. The company$$s tax rate is $40\%.(10$ marks$)$

b$)$ If a firm changes its mix of debt and equity financing, its weighted average cost of capital will

change for $2$ main reasons. Identify these $2$ reasons, and briefly explain why the firm$$s WACC

will change. $(4$ marks$)$

QUESTION $6(10$ marks$)(15$ minutes$)$

$5$