Answer to Question #293704 in Finance for MAR

Question #293704

q1

ABC has the following capital structure. What is the WACC for the company?

 

Debt:

Bond 1. 400,000 bonds with a coupon rate of 6% (paid semi-annually), a price quote of 110.0 and have 20 years to maturity.

 

 

Bond 2. 300,000 zero coupon bonds (semi-annual compounding) with a price quote of 40.0 and 25 years until maturity.

 

Preferred stock:

600,000 shares of 4 percent preferred stock with a current price of $60, and a par value of $100.

 

Common stock:

12,000,000 shares of common stock, with a price of $80, and a beta of 1.3.

 

Market:

The corporate tax rate is 40 percent, the market risk premium is 9%, and the risk-free rate is 4%.

 

 

 

 

Question 2

The ABC stock has a beta of 1.4. The company just paid a dividend of $2.0, and the dividend is expected to grow at 6% per year, indefinitely. The expected market return is 14%, and the risk-free is 4%. The most recent stock price for ABC is $60. Calculate the cost of equity using the SML method.

 



1
Expert's answer
2022-02-03T13:56:32-0500

Q1

B1=400000×110=44000000B1=400 000\times110=44 000 000

B2=300000×40=120000000B2=300000\times40=12 000 0000

Sp=600000×60=36000000Sp=600 000\times60=36 000 000

Sc=12000000×80=960000000Sc=12 000 000\times80=960 000 000


capital=44+12+36+960=1052


let's N=120

YTM1=7.2+12011020120+1102=7.7115=0.0669YTM1=\frac{7.2+\frac{120-110}{20}}{\frac{120+110}{2}}=\frac{7.7}{115}=0.0669

YTM1=0.0669×2=0.1338YTM1=0.0669\times2=0.1338


let's N=50

YTM2=50401251=0.0089YTM2=\frac{50}{40}^{\frac{1}{25}}-1=0.0089

YTM2=0.0089×2=0.0178YTM2=0.0089\times2=0.0178


CARM=4+1.3(94)=10.5CARM=4+1.3(9-4)=10.5


r=460=0.0667r=\frac{4}{60}=0.0667


WACC=441052×13.38(10.4)+121052×1.78(10.4)+361052×6.67+9601052×10.5=10.16WACC=\frac{44}{1052}\times13.38(1-0.4)+\frac{12}{1052}\times1.78(1-0.4)+\frac{36}{1052}\times6.67+\frac{960}{1052}\times10.5=10.16


Q2

CARM=4+1.4(144)=18CARM=4+1.4(14-4)=18


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