The firm’s market value capital structure is $503,910,000.
The rate the firm should use to discount the project’s cash flows is 9.33%.
a.
We will begin by finding the market value of each type of financing. We find:
Market value of debt = MVD = 105,000*($1,000)*(1.07) = $25,750,000
Market value of preferred cost = MVP = 220,000*($83) = $18,260,000
Market value of equity = MVE = 6,300,000*($73) = $459,900,000
And the total market value of the firm is:
V = $25,750,000 + 18,260,000+ 459,900,000
V = $503,910,000
b.
So, the market value weights of the company's financing are:
D/V = $25,750,000/$503,910,000 = 0.0511
P/V = $18,260,000/$503,910,000 = 0.0362
E/V = $459,900,000/$503,910,000 = 0.9127
For projects equally as risky as the firm itself, the WACC should be used as the discount rate.
First, we can find the cost of equity using the CAPM. The cost of equity is:
RE = .031 + 1.15(.071)
RE = 0.1030, or 10.03%
The cost of debt is the YTM of the bonds, so:
P0 = $1,070 = $26.50(PVIFAR%,34) + $1,000(PVIFR%,34)
R = 2.228%
YTM = 2.228% × 2
YTM = 4.46%
And the aftertax cost of debt is:
RD = (1 - .22)(.0446)
RD = .0348, or 3.48%
The cost of preferred stock is:
RP = $3.60/$73
RP = .0493, or 4.93%
Now we can calculate the WACC as:
WACC = 0.0511(.0348) + 0.0362(.0493) + 0.9127(.1003)
WACC =0.0933, or 9.33%
Hence, The firm’s market value capital structure is $503,910,000.
The rate the firm should use to discount the project’s cash flows is 9.33%.
Learn more about equity valuation:
brainly.com/question/17191274
#SPJ1
