Business, 19.10.2019 00:30 neptunesx

The saunders investment bank has the following financing outstanding. debt: 120,000 bonds with a coupon rate of 8 percent and a current price quote of 110.0; the bonds have 20 years to maturity. 290,000 zero coupon bonds with a price quote of 17.5 and 30 years until maturity. preferred stock: 210,000 shares of 6 percent preferred stock with a current price of $70, and a par value of $100. common stock: 3,200,000 shares of common stock; the current price is $56, and the beta of the stock is 1.05. market: the corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent. what is the wacc for the company?

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Answer from: taylorreneeax9227

R_Wacc = 11,35% (48%) + 8,57% (4%) + 4,18% (35%) + 3,59% (13%) = 7,70%

Explanation:

Re: 11,35% Cost of Common Equity

Re: 8,57% Cost of Preferred STOCK

Re: 4,18% Cost of Debt BONDS

Rd: 3,59% Cost of Zero BONDS

Equity :

$179,200,000 Market Value of the firm's Common Equity

Preferred Stock:

$14,700,000 Market Value of the firm's Preferred STOCK

Debt bonds :

$132,000,000 Market Value of the firm's Debt BONDS

Zero bonds :

$49,300,000 Market Value of the firm's ZERO BONDS

V: $375,200,000 E+D = Total Market Value of the firm's financing

E/V: 48% Percentage of financing that is Common Equity

PS/V: 4% Percentage of financing that is Preferred Stock

DB/V: 35% Percentage of financing that is Debt Bonds

ZB/V: 13% Percentage of financing that is Zero Bonds

Tc: 40% Corporate tax rate

Total Market Value

Market value of debt Bonds:

120,000 x $1,000 x 110% = $132,000,000

Market value of debt Zero Coupon:

290,000 x $1,000 x 17% = $49,300,000

Market value of preferred stock:

210,000 x $70 = $14,700,000

Market value of common stock:

3,200,000 x $56 = $179,200,000

TOTAL = $375,200,000

Using the CAPM model we can calculate the costo of equity:

R = 0,04 + 1,05(0,07) = 11,35%

The cost of debt is the YTM of the bonds, so:

P0= $1,110 = $40(PVIFAR%,40) + $1,000(PVIFR%,40) =

R = 6,97%

The aftertax cost of debt is:

R_Bonds : (1 - 0,4) x (0,0697) = 4,18%

The aftertax cost of zero coupon bonds is:

Yield To Maturity = (Face Value/Current Bond Price)^(1/Years To Maturity)−1 = 5,98%

(Face Value/Current Bond Price) = '$1,000/$175 (1/Years To Maturity) = 1/30

The aftertax cost of debt is:

R_ZeroB : (1 - 0,4) x (0,0598) = 3,59%

We can use the preferred stock pricing equation, which is the level perpetuity equation, so the required return on the company’s preferred stock is:

Rp= D1/P0 = $6/$70 = 8,57%

Rp = Required Return D1 = Dividend P0 = Price

Answer from: Quest

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Answer from: Quest

If its a multiple choice test, then it should be a conservationist.

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The saunders investment bank has the following financing outstanding. debt: 120,000 bonds with a co...