National Products Inc. wants to calculate its weighted average cost of capital (WACC).The company’s CFO has collected the following information:• The company has a long-term bond outstanding, valued at $20 million. The bond is a semiannualcoupon bond with 6% coupon rate, and 5 years left to maturity. The current price is $959.45 for$1,000 par value.• The company’s preferred stock pays a fixed dividend of $2 per share, and the preferred stockprice is $20.• The company’s common stock price is $32 a share, and recently paid a dividend of $2 a share.• The dividend is expected to grow at a constant rate of 6% per year.• The company has the target capital structure of $50 million in equity, $10 million in preferredstock and $20 million in debt.• The company’s tax rate is 40%. What is the company weighted average cost of capital?

National Products Inc. wants to calculate its weighted average cost of capital (WACC).The company’s CFO has collected the following information:• The company has a long-term bond outstanding, valued at $20 million. The bond is a semiannualcoupon bond with 6% coupon rate, and 5 years left to maturity. The current price is $959.45 for$1,000 par value.• The company’s preferred stock pays a fixed dividend of $2 per share, and the preferred stockprice is $20.• The company’s common stock price is $32 a share, and recently paid a dividend of $2 a share.• The dividend is expected to grow at a constant rate of 6% per year.• The company has the target capital structure of $50 million in equity, $10 million in preferredstock and $20 million in debt.• The company’s tax rate is 40%. What is the company weighted average cost of capital?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

See similar textbooks

Similar questions

The following table gives the current balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. Travellers Inn (Millions of Dollars) The following facts also apply to TII. (1) The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of 1,000. Currently, these bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity. (2) TIIs perpetual preferred stock has a 100 par value, pays a quarterly dividend per share of 2, and has a yield to investors of 10%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.85% flotation cost to sell it. (3) The company has 3.8 million shares of common stock outstanding, a price per share = P0 = 20, dividend per share = D0 = 1, and earnings per share = EPS0 = 5. The return on equity (ROE) is expected to be 10%. (4) The stock has a beta of 1.6%. The T-bond rate is 6%, and RPM is estimated to be 5%. (5) TIIs financial vice president recently polled some pension fund investment managers who hold TIIs securities regarding what minimum rate of return on TIIs common would make them willing to buy the common rather than TII bonds, given that the bonds yielded 11.8%. The responses suggested a risk premium over TII bonds of 3 percentage points. (6) TII is in the 25% federal-plus-state tax bracket. Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the companys WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the assets TII now operates. Based on your analysis, answer the following questions. a. What are the current market value weights for debt, preferred stock, and common stock? (Hint: Do your work in dollars, not millions of dollars. When you calculate the market values of debt and preferred stock, be sure to round the market price per bond and the market price per share of preferred to the nearest penny.) b. What is the after-tax cost of debt? c. What is the cost of preferred stock? d. What is the required return on common stock using CAPM? e. Use the retention growth equation to estimate the expected growth rate. Then use the expected growth rate and the dividend growth model to estimate the required return on common stock. f. What is the required return on common stock using the own-bond-yield-plus-judgmental-risk-premium approach? g. Use the required return on stock from the CAPM model, and calculate the WACC.
National Products Inc. wants to calculate its weighted average cost of capital (WACC).The company’s CFO has collected the following information:• The company has a long-term bond outstanding, valued at $20 million. The bond is a semiannualcoupon bond with 6% coupon rate, and 5 years left to maturity. The current price is $959.45 for$1,000 par value.• The company’s preferred stock pays a fixed dividend of $2 per share, and the preferred stockprice is $20.• The company’s common stock price is $32 a share, and recently paid a dividend of $2 a share.• The dividend is expected to grow at a constant rate of 6% per year.• The company has the target capital structure of $50 million in equity, $10 million in preferredstock and $20 million in debt.• The company’s tax rate is 40%.a. What is the company’s before-tax cost of debt?
National Products Inc. wants to calculate its weighted average cost of capital (WACC).The company’s CFO has collected the following information:• The company has a long-term bond outstanding, valued at $20 million. The bond is a semiannualcoupon bond with 6% coupon rate, and 5 years left to maturity. The current price is $959.45 for$1,000 par value.• The company’s preferred stock pays a fixed dividend of $2 per share, and the preferred stockprice is $20.• The company’s common stock price is $32 a share, and recently paid a dividend of $2 a share.• The dividend is expected to grow at a constant rate of 6% per year.• The company has the target capital structure of $50 million in equity, $10 million in preferredstock and $20 million in debt.• The company’s tax rate is 40%.a. What is the company’s before-tax cost of debt?Before-tax cost of debt = %b. What is the company’s cost of preferred stock?Cost of preferred stock = %c. What is the company’s cost of common stock?Cost of common stock =
ABC Corp has 20,000 shares of bonds outstanding with a coupon rate of 6%, face value of $1,000, and 30 years to maturity. The bonds are selling for 110 percent of par and make semiannual payments. The company also has 600,000 shares outstanding of common stock selling for $67 per share. The beta of the stock is 1.29 and the tax rate is 21%. a. If the Treasury bill rate is 3% and the market risk premium is estimated at 7%., what is ABC’s cost of equity capital? b. What is the WACC? c. ABC Corp plans to expand the current operations. If the project will pay a cash flow of 10,000 next year and then cash flows growing at a rate of 4% over the next 3 years (for a total of 4 of cash flows), what is the most ABC is willing to spend on the initial investment for this project? Please show exceln formulas
Consider Huggins Production which has the following information about its capital structures: Debt - 1,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 80 percent of par, the bonds make semi-annual payments Common Stock - 100,000 shares outstanding, selling for $45 per share; the beta is 0.80 Preferred Stock - 25,000 shares of 6 percent preferred stock outstanding, currently selling for $150 per share Market Information - 6 percent market risk premium and 4 percent risk-free rate. Required: Calculate the following if the company has a tax rate of 36 percent. 1. Cost of Preferred Stock 2. Weighted Average Cost of Capital
A company's capital structure consists of: 1.100,000 bonds,each with a face value of $100 paying a wemi-annual coupon of 6% p.a.,and with 5 years to maturity.These bonds are currently trading at a market yield of 5% p.a. 2.1,000,000 ordinary shares currently trading at $20 each. If the company was calculating its weighted average cost of capital(WACC),the proportion of financing provided by bonds is:
Consider Higgins Production which has the following information about its capital structures:Debt - 1,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for80 percent of par, the bonds make semi-annual payments Common Stock - 100,000 shares outstanding, selling for $45 per share; the beta is 0.80 Preferred Stock - 25,000 shares of 6 percent preferred stock outstanding, currently sellingfor $150 per share Market Information - 6 percent market risk premium and 4 percent risk-free rate.Required: Calculate the following if the company has a tax rate of 36 percent.Cost of Equity Weighted Average Cost of Capital
Consider Higgins Production which has the following information about its capital structures:Debt - 1,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for80 percent of par, the bonds make semi-annual payments Common Stock - 100,000 shares outstanding, selling for $45 per share; the beta is 0.80 Preferred Stock - 25,000 shares of 6 percent preferred stock outstanding, currently sellingfor $150 per share Market Information - 6 percent market risk premium and 4 percent risk-free rate.Required: Calculate the following if the company has a tax rate of 36 percent. Total Market Value for the Firm After-tax cost of Debt Cost of Equity Cost of Preferred Stock Weighted Average Cost of Capital
Consider Higgins Production which has the following information about its capital structures: Debt - 1,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 80 percent of par, the bonds make semiannual payments  Common Stock - 100,000 shares outstanding, selling for $45 per share; the beta is 0.80  Preferred Stock - 25,000 shares of 6 percent preferred stock outstanding, currently selling for $150 per share  Market Information - 6 percent market risk premium and 4 percent risk-free rate. Required: Calculate to the following if the company has a tax rate of 36 percent. WHAT IS Cost of Equity ?
Consider Higgins Production which has the following information about its capital structures:Debt - 1,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 80 percent of par, the bonds make semi-annual payments Common Stock - 100,000 shares outstanding, selling for $45 per share; the beta is 0.80 Preferred Stock - 25,000 shares of 6 percent preferred stock outstanding, currently selling for $150 per share Market Information - 6 percent market risk premium and 4 percent risk-free rate. Required: Calculate the following if the company has a tax rate of 36 percent. Show all working.i. Total Market Value for the Firmii. After-tax cost of Debtiii. Cost of Equityiv. Cost of Preferred Stockv. Weighted Average Cost of Capital
Consider Higgins Production which has the following information about its capital structures: Debt - 1,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 80 percent of par, the bonds make semi-annual payments  Common Stock - 100,000 shares outstanding, selling for $45 per share; the beta is 0.80  Preferred Stock - 25,000 shares of 6 percent preferred stock outstanding, currently selling for $150 per share  Market Information - 6 percent market risk premium and 4 percent risk-free rate. Required: Calculate the following if the company has a tax rate of 36 percent. i. Total Market Value for the Firm ii. After-tax cost of Debt iii. Cost of Equity iv. Cost of Preferred Stock v. Weighted Average Cost of Capital
A firm has two classes of securities: long-term bonds and common stock. The bonds have 16 years to maturity, a coupon rate of 5%, semi-annual coupon payments, a yield-to-maturity of 8.6%, and $749 million of total par value. The stock has 31 million shares outstanding and a current market price of $26. When computing the WACC, what weight should the firm assign to its cost of debt? Enter your answer as a decimal and show two decimal places.