1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Lemur [1.5K]
3 years ago
13

Masterson, Inc., has 4.1 million shares of common stock outstanding. The current share price is $84, and the book value per shar

e is $11. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, has a coupon rate of 5.1%, and sells for 98% of par. The second issue has a face value of $50 million, has a coupon rate of 5.60%, and sells for 108% of par. The first issue matures in 20 years, the second in 12 years. The most recent dividend was $3.95 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company’s WACC?
Business
1 answer:
Kitty [74]3 years ago
7 0

Answer:

The answer is "8.37%".

Explanation:

\text{MV of equity} = \text{equity price}  \times \text{number of outstanding shares}

                     =84 \times 4100000\\\\=344400000

\text{MV of Bond1}=\text{Par value} \times \text{bonds outstanding} \times \text{age of percentage}

                      =1000 \times 70000 \times 0.98 \\\\=68600000

\text{MV of Bond2}=\text{Par value} \times \text{bonds outstanding} \times \text{age of percentage}

                      =1000 \times 50000 \times 1.08 \\\\=54000000

\text{MV of firm} = \text{MV of Equity} + \text{MV of Bond1}+ \text{MV of Bond 2}

                  =344400000+68600000+54000000\\\\=467000000

\text{Weight of equity W(E)} = \frac{\text{MV of Equity}}{\text{MV of firm}}

                                     = \frac{344400000}{467000000}\\\\=0.7375

\text{Weight of debt W(D)}= \frac{\text{MV of Bond}}{\text{MV of firm}}

                                  = \frac{122600000}{467000000}\\\\=0.2625

Equity charges

By DDM.  

\text{Price = new dividend} \times  \frac{(1 + \text{rate of growth})}{( \text{Equity expense-rate of growth)}}

84 = 3.95  \times  \frac{(1+0.05)}{(\text{Cost of equity}- 0.05)}\\\\84 = 3.95  \times  \frac{(1.05)}{(\text{Cost of equity} - 0.05)}\\\\84 = \frac{4.1475}{ (\text{Cost of equity} - 0.05)}\\\\\text{Cost of equity} -0.05 = \frac{4.1475}{84}\\\\\text{Cost of equity} -0.05 = 0.049375\\\\\text{Cost of equity}  = 0.049375 + 0.05\\\\\text{Cost of equity}  = 0.099375 \\\\\text{Cost of equity} \%  = 9.9375 \% \ \ \ or  \ \ \ 9.94 \%  \\\\

Debt expenses  

Bond1

K = N \times 2 \\\\

Bond \ Price = \sum  [ \frac{\text{(Semi Annual Coupon)}}{(1 + \frac{YTM}{2})^k}]     +   \frac{Par\  value}{(1 + \frac{YTM}{2})^{N \times 2}}

k=1\\\\K =20 \times 2\\\\980 = \sum  [ \frac {(5.1 \times \frac{1000}{200})}{(1 + \frac{YTM}{200})^k}] +   \frac{1000}{(1 + \frac{YTM}{200})}^{20 \times 2}\\\\k=1\\\\\ YTM1 = 5.2628923903\\\\Bond2\\

K = N \times 2

Bond \ Price = \sum  [ \frac{\text{(Semi Annual Coupon)}}{(1 + \frac{YTM}{2})^k}]     +   \frac{Par\  value}{(1 + \frac{YTM}{2})^{N \times 2}}

k=1\\\\K =12 \times 2\\\\

1080 =\sum [\frac{(5.6 \times \frac{1000}{200})}{(1 + \frac{YTM}{200})^k}] +\frac{1000}{(1 +\frac{YTM}{200})^{12 \times 2}} \\\\k=1\\\\YTM2 = 4.72\\\\

\text{Company debt costs} = YTM1 times \frac{(MV \ bond1)}{(MV \ bond1+MV \ bond2)}+YTM2 \times \frac{(MV \ bond2)}{(MV \ bond2)}\\\\

The cost of the debt for the company:

= 5.2628923903 \times \frac{(68600000)}{(68600000+54000000)}+4.72 \times \frac{(68600000)}{(68600000+54000000)}\\\\

Business debt cost=5.02 \% \\\\

after taxation cost of debt:  

= \text{cost of debt} \times (1- tax \ rate)\\\\= 5.02 \times (1-0.21)\\\\= 3.9658\\\\

WACC= \text{after debt charges} \times W(D)+equity cost  \times W(E) \\\\

            =3.97 \times 0.2625+9.94 \times 0.7375 \\\\ =8.37 \% \\\\

You might be interested in
According to the Census Bureau, in October 2016, the average house price in the United States was $27,258. 6 years earlier, the
krek1111 [17]

Answer:

Annual increase is $1,108.4

Explanation:

In 2016, average price was $27,258.6

In 2010, average price was $20,608

Average increase in 6 years = $27,258.6 - $20,608 = $6,650.6

Annual average increase = $6650.6/6 = $1,108.4

5 0
3 years ago
A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note
Leokris [45]

Answer:

The note payable will be presented in the financial statement at the face amount minus a discount calculated at the imputed interest rate.

Explanation:

The imputed rate is the rate at which the present value of the face amount of the note will be equal to the amount at which it is originally recorded.  

Notes issued or received in exchange for goods or services that do not bear interest at a fair rate are reported at an amount equal to the fair value of the note, the fair value of the goods or services, or the present value of the note using a fair interest rate, whichever is more readily determinable.  

The difference between the recorded amount and the face value is considered a discount and the applicable interest rate regardless of which method is used to value the note.

Because of this, the note is reported at its face amount minus a discount calculated at the imputed interest rate.

3 0
3 years ago
When the fed sells treasury bonds on the open market, it will tend to?
Ne4ueva [31]
Here is my answer. DECREASING THE MONEY SUPPLY AND RAISING THE INTEREST RATES is what happens when the Treasury Bonds are being sold by Fed on the open market. An open market is also the same with free market wherein there are only minimal restrictions. Hope this helps.
7 0
2 years ago
Which of the following are true about productive efficiency? I. All available resources are employed in production. II. Workers
dalvyx [7]

Answer:

III. Points on the PPF curve are the only ones that achieve "productive efficiency"

Explanation:

What is true about productive efficiency is that Points on the PPF curve are the only ones that achieve "productive efficiency".

Productive efficiency is an economic term that is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.

For it to be said that an economy is productively efficient means the economy must be producing on its production possibility frontier

Hence productive efficiency happens when production is reportedly occurring along a production possibility frontier (PPF).

7 0
3 years ago
An industry that has many companies offering the same basic product, but with some slight difference is
mario62 [17]

An industry that has many companies offering the same basic product, but with some slight difference is B. monopolistic competition.

Monopolistic competition is found in industries where slight differences of a product is possible but they basically offer the same thing. A few examples of monopolistic competition are those in the restaurant or hospitality career field. These businesses offer food or hotel rooms which are what their competitions offer as well, but what they include within their packages or their food offerings may differ.

6 0
3 years ago
Other questions:
  • Monetary policy administered by the fed is the principal method of softening the effects of the business cycle because _____.
    11·2 answers
  • A market system is characterized by the private ownership of resources and the use of prices to coordinate economic activity tru
    5·1 answer
  • Colin Powell sees leadership as the ability to solve problems. <br> O True <br> O False
    8·2 answers
  • When are business letters necessary?
    10·2 answers
  • Because cost of living varies, it is important to consider location when conducting a job search
    6·1 answer
  • Efficiency
    15·1 answer
  • This chapter states that most economists would probably maintain that new technologies are the single most important source of p
    9·1 answer
  • While noreen was driving down the highway, she saw two cars on the side of the road. she noticed that no one was hurt and that n
    14·1 answer
  • Why might an individual find a $20 Federal Reserve Note to be more desirable as a form of money than a $20 gold coin? Which woul
    13·1 answer
  • 1. Un plan de mercadeo debe estar sustentado en
    15·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!