Question

You are given the following information on Parrothead Enterprises:
Debt:	9,200 6.4 percent coupon bonds outstanding, with 23 years to maturity and a quoted price of 104.5. These bonds pay interest semiannually and have a par value of $1,000.
Common stock:	235,000 shares of common stock selling for $64.70 per share. The stock has a beta of .92 and will pay a dividend of $2.90 next year. The dividend is expected to grow by 5.2 percent per year indefinitely.
Preferred stock:	8,200 shares of 4.6 percent preferred stock selling at $94.20 per share. The par value is $100 per share.
Market:	11.8 percent expected return, risk-free rate of 3.7 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.)

All of this information is correct.

Answer 1

: x V fix =C2/$C$11 A DE WACC (Cost Weights %xWeights) 0.5941] 6.19% Component Cost 10.42% 2 Common stock 3 Market value $ 15,204,500.00 =235000*64.7 5 Preferred stock $ 0.0302 0.15% 4.88% =4.6/94.2 772,440.00 =8200*94.2 6 $ 0.3757 1.77% 4.71% =RATE(23*2,64/2,-1045,1000,0)*2*(1-22%) 9,614,000.00 =9200*1045 8 Debt 9 10 11 12 Total $ 25,590,940.00 1.0000 13 Weighted average cost of capital 8.11% 14 15 Common stock (under dividend growth) 16 Common stock (under CAPM) 17 18 Average cost of equity 9.68% =2.9/64.7+5.2% 11.15% =3.7%+0.92*(11.8%-3.7%) 10.42%

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