Question

Please, help with this exercise.
Thanks in advance.

Corporate Finance A2 1. The joint stock company has a total capital of 300 mil. USD. The company has the following structure of capital: a) 200 mil. USD of shares where 180 mil. USD are in common stock and remaining part belongs to preferred stock b) Long-term loans is 60 mil. USD with 3 % pa c) Short-term loans is 40 mil. USD with 10 % pa Determine the weighted average of capital for following company under these conditions: Income tax is 20 % Preferred stocks have a nominal value of 10 000 USD per share. They are traded for 11 000 USD and guaranteed (promised) a permanent priority dividend 1 000 USD annum per share ommon stocks were issued at a nominal value of 2 000 USD per share. Flotation cost of these new shares were calculated at 50 USD per share. Shares are traded on the market for 2 400 USD per share. Dividend is assumed at 10 % of par value in the first year, where the expected growth of dividends is assumed at 1 % every year Long-term loans are provided at a current rate of 1 % every year, with a maturity 10 years. Short-term loans have a current rate of 10 % with a maturity 9 month II. IV. V. Calculate on separate paper and here put the results, please 1. Market value of common stock 2. Market value of preferred stock Market value of short-term debt 3. Market value of long-term debt 4. 5. Cost of debt for short-term debt Cost of debt for long-term debt Cost of equity for common stock 6. 7. 8. Cost of equity for preferred stock WACC using market values 9.

Answer 1

1. Market value of common stock =$216 million

Total equity value = $180 million

Nominal value per share = $2,000

Number of shares= 180,000,000 / 2,000 = 90,000

Market capitalization = 90000 * market price per share = 90,000 * 2,400 = $216 million

2. Market value of preferred stock = Total preferred equity / nominal value * market price of preferred stock

= 20,000,000 / 10,000 * 11,000

Market value of preferred stock = $22 million

3. Market value of short term debt = $40 million

Since current rate on short term debt is 10%, same as interest rate of 10% on short term debt.

Hence market value is same book value for short term debt= $40 million

4. Market value of long term debt = $71.37 million

Current rate is 1% lower than interest rate of 3% on long term debt, hence long term debt is trading at premium.

Using PV function on excel , =PV(1%,10,1.8,60) =$71.37 million

5. Cost of debt for short term loan= 10% per annum which $3 million for 9 months

for 9 months = 10% *9/12 * 40 = $3 million

6. Cost of debt for long term loan = 3% per annum ($1.8 million per year)

for 1 year = 3% * 60 = $1.8 million per year

7. Cost of equity for common stock

Market price per common stock = Dividend * (1+ dividend growth rate) / (cost of equity - dividend growth rate)

2400 = (10% *2000) * (1+1%) / (cost of equity -1%)

Cost of equity = 200 * 1.01 / 2400 +1%

Cost of equity =9.42%

8. Cost of preferred stock = Dividend per share / nominal price per share = 1000/10000

Cost of preferred stock =10%

9. WACC =7.87%

WACC = equity weight * cost of equity + preferred share weight * cost of preferred shares + debt weight * cost of debt * (1-tax rate)

= 180/300 * 9.42% + 20/300 *10% + 100/300*((60*3%+40*10%)/(60+40))* (1-20%)

= 5.652% + 0.667%+1.547%

= 7.87%

Answer 2

Hi, please help me in the same example, i have minor changes like, b. Long-term loans are 60 mil. USD c. Short-term loans are 40 mil. USD... Without 3% pa and all so how to calculate wacc now? Should I skip debt weight * cost of debt from formula Pls help