Answer:
R_Wacc = 11,35% (48%) + 8,57% (4%) + 4,18% (35%) + 3,59% (13%) = 7,70%
Explanation:
Re: 11,35% Cost of Common Equity
Re: 8,57% Cost of Preferred STOCK
Re: 4,18% Cost of Debt BONDS
Rd: 3,59% Cost of Zero BONDS
$179,200,000 Market Value of the firm's Common Equity
$14,700,000 Market Value of the firm's Preferred STOCK
$132,000,000 Market Value of the firm's Debt BONDS
$49,300,000 Market Value of the firm's ZERO BONDS
V: $375,200,000 E+D = Total Market Value of the firm's financing
E/V: 48% Percentage of financing that is Common Equity
PS/V: 4% Percentage of financing that is Preferred Stock
DB/V: 35% Percentage of financing that is Debt Bonds
ZB/V: 13% Percentage of financing that is Zero Bonds
Tc: 40% Corporate tax rate
Market value of debt Bonds:
120,000 x $1,000 x 110% = $132,000,000
Market value of debt Zero Coupon:
290,000 x $1,000 x 17% = $49,300,000
Market value of preferred stock:
210,000 x $70 = $14,700,000
Market value of common stock:
3,200,000 x $56 = $179,200,000
TOTAL = $375,200,000
- Using the CAPM model we can calculate the costo of equity:
R = 0,04 + 1,05(0,07) = 11,35%
- The cost of debt is the YTM of the bonds, so:
P0= $1,110 = $40(PVIFAR%,40) + $1,000(PVIFR%,40) =
R = 6,97%
- The aftertax cost of debt is:
R_Bonds : (1 - 0,4) x (0,0697) = 4,18%
- The aftertax cost of zero coupon bonds is:
Yield To Maturity = (Face Value/Current Bond Price)^(1/Years To Maturity)−1 = 5,98%
(Face Value/Current Bond Price) = '$1,000/$175 (1/Years To Maturity) = 1/30
- The aftertax cost of debt is:
R_ZeroB : (1 - 0,4) x (0,0598) = 3,59%
- We can use the preferred stock pricing equation, which is the level perpetuity equation, so the required return on the company’s preferred stock is:
Rp= D1/P0 = $6/$70 = 8,57%
Rp = Required Return D1 = Dividend P0 = Price
