Question

Hankins Corporation has 8.1 million shares of common stock outstanding, 300,000 shares of 4.1 percent preferred stock outstanding, par value of $100; and 185,000 bonds with a semiannual coupon rate of 5.5 percent outstanding, par value $2,000 each. The common stock currently sells for $57 per share and has a beta of 1.15, the preferred stock has a par value of $100 and currently sells for $99 per share, and the bonds have 18 years to maturity and sell for 107 percent of par. The market risk premium is 6.6 percent, T-bills are yielding 3.3 percent, and the company’s tax rate is 24 percent.A. What is the firm’s market value capital structure?B. If the company is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows?Solve for:A. DebtPreferred StockEquityB. Discount Rate

Answer 1

Answer:

common stocks = 8,100,000 x $57 = $461,700,000

preferred stocks = 300,000 x $99 = $29,700,00

debt = 185,000 x $2,000 x 1.07 = $395,900,000

total market value = $887,300,000

a)

capital structure:

common stocks = $461,700,000 / $887,300,000 = 52.03%

preferred stocks = $29,700,00 / $887,300,000 = 3.35%

debt = $395,900,000 / $887,300,000 = 44.62%

b) WACC = 7.48%

Re = 3.3% + (1.15 x 6.6%) = 10.89%

Cost of preferred stock = 4.1 / 99 = 4.14%

cost of debt = YTM = {55 + [(2,000 - 2,140)/36]} / [(2,000 + 2,140)/2] = 51.11 / 2,070 = 2.469 x 2 = 4.94%

WACC = (10.89 x 52.03%) + (4.14 x 3.35%) + (4.94 x 44.62% x 0.76) = 5.67% + 0.14% + 1.67% = 7.48%