Answer:
the company's WACC = 7.85%
Explanation:
we must first determine the market value of debt, preferred stocks and common stocks:
debt 1 = 50,000 x $1,000 x 1.1 = $55,000,000, weight 20.31%
debt 2 = 220,000 x $1,000 x 0.18 = $39,600,000, weight 14.62%
preferred stock = 140,000 x $80 = $11,200,000. weight 4.14%
common stock = 2,500,000 x $66 = $165,000,000, weight 60.93%
total market value = $270,800,000
cost of debt 1:
YTM = {35 + [(1,000 - 1,100)/40]} / [(1,000 + 1,100)/2] = 32.5/1,050 = 3.095 x 2 = 6.19%
after tax cost = 6.19% x 0.65 = 4.02%
cost of debt 2:
price = face value / (1 + i)ⁿ
180 = 1,000 / (1 + i)³⁰
(1 + i)³⁰ = 1,000 / 180 = 5.55555
³⁰√(1 + i)³⁰ = ³⁰√5.55555
1 + i = 1.058825
i = 0.058825 = 5.8825%
after tax cost = 5.8825% x 0.65 = 3.82%
cost of preferred stocks = 5 / 80 = 6.25%
cost of equity:
Re = Rf + (B x MP) = 3% + (1.2 x 6%) = 10.2%
the company's WACC = (60.93% x 0.102) + (4.14% x 0.0625) + (20.31% x 0.0402) + (14.62% x 0.0382) = 6.21% + 0.26% + 0.82% + 0.56% = 7.85%
