Question

Haslem, Inc. has 3 million shares of common stock outstanding, 1 million shares of preferred stock, and 80,000 bonds. The common stock is selling for $50 per share, the preferred stock is selling for $33 per share, and the bonds are 25 year, 8.5%, $1,000 bonds that are presently selling for $1,080 (semiannual interest). The preferred stock pays an annual dividend of $2.70, and the common dividend paid in the year just ended was $2.40. The dividend on the common stock is projected to grow at a rate of 6% indefinitely

Answer 1

Answer:

8.37%

Explanation:

WACC = [E / (D + E)](Re) + [D / (D + E)](Rd)(1 - T)

E = market value of equity

D = market value of debt

Re = cost of equity

Rd = cost of debt

T = taxes

• E = 3,000,000 common stocks x $50 = $150,000,000
• DP = 1,000,000 preferred stock x $33 = $33,000,000
• DB = 80,000 bonds x $1,080 = $86,400,000
• Re = (dividend / stock price) + growth rate = ($2.4 / $50) + 6% = 0.048 + 6% = 0.108 or 10.8%
• Rdp = $2.70 / $33 = 8.18%
• Rdb = $85 / $1,080 = 7.87%
• T = 33%

WACC = [E / (D + E)](Re) + [DP / (D + E)](Rdp)(1 - T) + [DB / (D + E)](Rdb)(1 - T)

since the numbers are too large, I will divide the calculation into three parts:

• [E / (D + E)](Re) = [$150,000,000 / ($119,400,000 + $150,000,000)](10.8%) = ($150,000,000 / $269,400,000) x 10.8% = 0.5568 x 10.8% = 0.0601 or 6.01%
• [DP / (D + E)](Rdp)(1 - T) = ($33,000,000 / $269,400,000) x 8.18% x (1 - 33%) = 0.1225 x 8.18% x 67% = 0.0067 or 0.67%
• [DB / (D + E)](Rdb)(1 - T) = ($86,400,000 / $269,400,000) x 7.87% x 67% = 0.0169 or 1.69%

WACC = 6.01% + 0.67% + 1.69% = 8.37%