Question

You are given the following information on Parrothead Enterprises: Debt: 9,300 6.5 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 104.75. These bonds pay interest semiannually and have a par value of $1.000. Common stock: 240,000 shares of common stock selling for $64.80 per share. The stock has a beta of.93 and will pay a dividend of $3.00 next year. The dividend is expected to grow by 5.3 percent per year indefinitely. Preferred stock: 8,300 shares of 4.65 percent preferred stock selling at $94.30 per share. The par value is $100 per share. Market: 11.7 percent expected return, risk-free rate of 3.75 percent, and a 23 percent tax rate. Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %

Answer 1

rate positively ..

	Computation of cost of equity =
		Using CAPM rate of equity = Risk free rate + market risk premium * beta
					=3.75%+(11.7%-3.75%)*0.93
					11.14%
		Using DDM = Expected dividend next year/Price today + Growth rate
					3/64.8+5.3%
					9.93%
		Cost of equity = Average of CAPM and DDM =					10.54%
	Cost of debt (after tax)
	we have to use financial calculator to compute YTM
	Put in calcualtor
	PV		-1047.5
	FV		1000
	PMT	1000*6.5%/2	32.5
	N	22*2	44
	Compute I		3.05%
	YTM =3.05%*2		6.10%
	tax rate =		23%
	therefore rate of debt (after tax) = 6.1%*(1-23%)					4.70%
	rate of debt (after tax) =			4.70%
	rate of preferred stock = Annual dividend/Current price
			=4.65/94.3
			4.93%
Computation of Weight and WACC
			Market value			weight	Cost of capital	weight * cost
	Source
	equity		15552000	240000*64.8		59.64%	10.54%	6.28%
	debt		9741750	1047.5*9300		37.36%	4.70%	1.76%
	preferred stock		782690	8300*94.3		3.00%	4.93%	0.15%
	Total		26076440					8.19%
	WACC =			8.19%