The capital structure for Magellan Corporation is shown below. Currently, flotation costs are 10% of market value for a new bond issue and $2 per share for preferred stock. The dividends for common stock were $3.00 last year and have an estimated annual growth rate of 4%. Market prices are $950. for bonds, $25 for preferred stock, and $35 for common stock. Assume a 34% tax rate. Financing Type % of Future Financing Bonds (8%, $1k par, 16 year maturity) 35% Common equity 46% Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) 19% Total % 100% Compute the company’s WACC. Is this WACC considered reasonable given the assumptions and other relevant information? Explain.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
. The capital structure for Magellan Corporation is shown below. Currently, flotation costs are 10% of market value for a new bond issue and $2 per share for
|
Financing Type |
% of Future Financing |
|
Bonds (8%, $1k par, 16 year maturity) |
35% |
|
Common equity |
46% |
|
Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) |
19% |
|
Total % |
100% |
Compute the company’s WACC. Is this WACC considered reasonable given the assumptions and other relevant information? Explain.
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