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
Which of the following might explain the evidence of an endowment effect in behavioral economics?A) Government regulation B) Kno
Juliette [100K]

Answer:

The correct answer is letter "D": Class envy.

Explanation:

In behavioral economics, the endowment effect explains why an individual could give a higher value to an object that posses than giving a low value when the individual does not have it. The approach implies the object has symbolic importance for the individual while having it.  

A good example of the endowment effect refers to a teacher that gives one of his classes' students mugs as gifts. The value of the students who received mugs was higher than the value of those who did not get one.

8 0
3 years ago
Management of Mcgibboney Corporation has asked your help as an intern in preparing some key reports for November. The beginning
harkovskaia [24]

Answer:

$87,000

Explanation:

Calculation of the conversion cost for November.

Conversion cost can be defined as the combination of both direct labor costs and manufacturing overhead costs that are vital to help convert raw materials into product.

Using this formula

Total Conversion cost = Direct labor cost + Manufacturing overhead cost

Hence,

Direct labor cost $25,000

Add Manufacturing overhead cost $62,000

Total Conversion cost $87,000

Therefore the conversion cost for November is $87,000

4 0
3 years ago
Pina Corporation entered into an operating lease agreement to lease equipment from Badger, Inc. on January 1, 2017. The lease ca
posledela

Answer:

= $80,273

Explanation:

Value of the right of use asset = Value of lease liability - cash incentive received + costs incurred for lease

                  = $82,773 -$ 6,000 + $3,000 + $500

                     =$80,273

4 0
3 years ago
Conventional wisdom says one should measure a manager's investment performance over an entire market cycle. What arguments suppo
White raven [17]

Answer:

In every form of analysis, it is always safer to take a macro or holistic view of the situation. This is true for the investment performance of a manager. One investment decision that went right does not suffice to classify an investment portfolio manager as proficient, neither is one that went south enough to tag him deficient.

The forecasting ability of managers, on the balance of probability, will vary for different cases, with a helicopter view of providing a more accurate measure of their performance.

However, if it was possible to analyse the market for volatility and adjust our forecasts it becomes unnecessary to look at and analyse all the information from a 12-month cycle before coming to terms about the performance of the manager.

Cheers!

4 0
3 years ago
Teams have better communication than other workers because they get to ______. A. Know each other better b. Attend communication
nadya68 [22]

A. Know each other better

Team refers to a group of people who come together to carry out interdependent task whilst also accomplishing a common mission or specific objective.

Team comprises individuals or employees who have complementary skills, knowledge and experience needed to execute a project successfully.

When a person is working in a team, he or she has the privilege of interacting with other team members hence create performance and strengthen the level of relationship amongst them.

It therefore means that teams have better communication than other workers because they get to know each other better in the course carrying out their duties.

learn more at : brainly.com/question/19724748

7 0
2 years ago
Other questions:
  • Hannah has been researching sales of garden supplies. She wants to show the pattern that sales follow over the course of a year.
    5·2 answers
  • The operations process includes which of the following activities?
    5·1 answer
  • A profit-maximizing decision must be made about whether to keep a bed & breakfast operating. Until the place sells, the mort
    9·1 answer
  • If Hazel decides to sell the best ice cream on earth, and intends to establish a strong ethical climate in her organization, dur
    13·1 answer
  • Fill in the blank: The _________ can help you develop a mission statement that connects with your audience. persona creation pro
    7·1 answer
  • Your client's company wants to determine the relationship between its monthly operating costs and a potential cost driver. The o
    13·1 answer
  • In the case where there is a homeowner's association to oversee a common interest community, and there are several common intere
    9·1 answer
  • The Work in Process Inventory account had a beginning balance of $16,200 on April 1. During April, the cost of direct materials
    14·1 answer
  • What is the office of management and budget primarily responsible for?
    14·1 answer
  • Ownership is held in ________ when all the rights of ownership in a particular piece of property are held by one person
    13·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!