Question

Please show work not done on excel. Thanks

16. Finding the WACC. Hankins Corporation has 5.4 million shares of common stock outstanding, 290,000 shares of 5.6 percent preferred stock outstanding, and 125,000 of 6.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64 per share and has a beta of 1.13, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 109 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firm's tax rate is 34 percent. a. What is the firm's market value capital structure? b. If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? itu firm is considering the following projects:

Answer 1

a

MV of equity=Price of equity*number of shares outstanding

MV of equity=64*5400000

=345600000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*125000*1.09

=136250000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=103*290000

=29870000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=345600000+136250000+29870000

=511720000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 345600000/511720000

W(E)=0.6754

Weight of debt = MV of Bond/MV of firm

Weight of debt = 136250000/511720000

W(D)=0.2663

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 29870000/511720000

W(PE)=0.0584

b

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 4.3 + 1.13 * (6.8)

Cost of equity% = 11.98

Cost of debt

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

1090 =∑ [(6.7*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2

k=1

YTM = 5.9259322402

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 5.9259322402*(1-0.34)

= 3.911115278532

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 5.6/(103)*100

=5.44

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=3.91*0.2663+11.98*0.6754+5.44*0.0584

WACC =9.45%