Question

You are given the following information concerning Parrothead Enterprises: Debt 13,000 6.4 percent coupon bonds outstanding, with 15 years to maturity and a quoted price of 107. These bonds pay interest semiannually. Common stock: 345,000 shares of common stock selling for $76.50 per share. The stock has a beta of.90 and will pay a dividend of $3.80 next year. The dividend is expected to grow by 5 percent per year indefinitely. Preferred stock: 10.000 shares of 4.4 percent preferred stock selling at $86 per share. Market 11 percent expected return, risk-free rate of 3.6 percent, and a 22 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 ..

a	Rate of equity =
		Using CAPM rate of equity = Risk free rate + market risk premium * beta
					=3.6%+(11%-3.6%)*0.9
					10.26%
		using DDM = 3.8/76.5+5%			9.97%
		Average required rate =			10.11%
b	Rate of debt (after tax)
	we have to use financial calculator to compute YTM
	Put in calcualtor
	PV		-1070
	FV		1000
	PMT	1000*6.4%/2	32
	N	15*2	30
	Compute I		2.85%
	YTM =	2.85%*2	5.70%
	tax rate =		22%
	therefore rate of debt (after tax) = 5.7%*(1-22%)					4.45%
	rate of debt (after tax) =			4.45%
c	rate of preferred stock = Annual dividend/Current price
			=4.4/86
			5.12%
Working for rest of question
Computation of Weight and WACC
			Market value			weight	Cost of capital	weight * cost
	Source
	equity		26392500	=345000*76.5		64.12%	10.11%	6.48%
	debt		13910000	=13000*1000*107%		33.79%	4.45%	1.50%
	preferred stock		860000	=10000*86		2.09%	5.12%	0.11%
			41162500					8.09%
	WACC =			8.09%