Business, 16.10.2020 08:01 alex7449

The Saunders Investment Bank has the following financing outstanding. Debt: 60,000 bonds with a coupon rate of 5.1 percent and a current price quote of 106.1; the bonds have 15 years to maturity and a par value of $1,000. 18,900 zero coupon bonds with a price quote of 21.6, 27 years until maturity, and a par value of $10,000. Both bonds have semiannual compounding.

Preferred stock: 155,000 shares of 2.9 percent preferred stock with a current price of $84 and a par value of $100.
Common stock: 2,300,000 shares of common stock; the current price is $92 and the beta of the stock is 1.20.
Market: The corporate tax rate is 25 percent, the market risk premium is 6.9 percent, and the risk-free rate is 3.5 percent.

Required:
What is the WACC for the company?

Answers: 1

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Answer from: raiindrxp

11,73 %

Explanation:

WACC = Ke × (E/V) + Kd × (D/V) + Kp × (E/V)

Ke = Cost of Equity

= Return on Risk Free Security + Beta × Risk Premium

= 3.5 % + 1.20 × 6.9 %

= 11.78 %

E/V = Weight of Equity

= (2,300,000 × $92) ÷ (2,300,000 × $92 + 60,000 × $106.10 + 18,900 × $21.60 + 155,000 × $84)

= 0.91

Kd = Cost of Debt

Debt : 60,000 bonds

Pv = ($106.10)

Pmt = (5.10% × $1,000) ÷ 2 = $25.50

n = 15 × 2 = 30

Fv = $1,000

P/yr = 2

i = ?

Pre-tax cost = 48.66 %

After tax cost = 0.75 × 48.66 %

= 36.50%

DV = Weight of Debt

= (60,000 × $106.10) ÷ (2,300,000 × $92 + 60,000 × $106.10 + 18,900 × $21.60 + 155,000 × $84)

= 0.03

Debt : 18,900 zero coupon bonds

Pv = ($21.60)

Pmt = $0

n = 27 × 2 = 54

Fv = $10,000

P/yr = 2

i = ?

Pre-tax cost = 24,07 %

After tax cost = 0.75 × 24,07 %

= 18.05%

DV = Weight of Debt

= (18,900 × $21.60) ÷ (2,300,000 × $92 + 60,000 × $106.10 + 18,900 × $21.60 + 155,000 × $84)

= 0.002

Kp = Cost of Preference Share

Market Rate = (Return × Par Value) ÷ Current Price

= (2.90 % × $100) ÷ $84

= 0.03 %

P/V = Weight of Preference Shares

= (155,000 × $84) ÷ (2,300,000 × $92 + 60,000 × $106.10 + 18,900 × $21.60 + 155,000 × $84)

= 0.06

WACC = 11.78 % × 0.91 + 36.50% × 0.03 + 18.05% × 0.002 + 0.03 % × 0.06

= 11,73 %

Answer from: Quest

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explanation:

Answer from: Quest

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The Saunders Investment Bank has the following financing outstanding. Debt: 60,000 bonds with a cou...

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