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anonymous

  • 5 years ago

Hey guys can you please help me solve this problem. Calculate the Weighted Average Cost of Capital (WACC) for a company with the following capital structure (20 points)? - 15,000,000 shares of common stock outstanding at current market price of $2.75/share - 2,000,000 shares of preferred stock with par value of $10.00/share and paying an annual dividend of 8.5% - Long-term debt of $45,000,000 with an interest rate of 7% The combined federal and state tax rate is 38% and you can assume that equity investors in the company are looking to achieve the long-term stock market return of 12.5%

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  1. anonymous
    • 5 years ago
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    this is to the best of my knoeledge.. i have tried to answer.. see the atttached file... correct me if i am wrong

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  2. anonymous
    • 5 years ago
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    The problem that i have is that I dont know how to find Rd and Re in the problem this is where i am stuck once I have this I am good to go

  3. anonymous
    • 5 years ago
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  4. anonymous
    • 5 years ago
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    10*2`000`000 is par value of pref. stocks, not market value. So I think you should calculate market value of pref. stocks as (10*0.085/0.125)*2`000`000. It would change weights, that Sevak Manukyan calculated, to common stocks = 41.31%; preferred stocks = 13.62%; debt = 45.07%, and WACC would be 8.28%, that is pretty close.

  5. anonymous
    • 5 years ago
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    what is Rd and Re

  6. anonymous
    • 5 years ago
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    I'm not exactly sure of this but perhaps in the simplest format: total value of the firm = 15M*2.75 + 2M*10 + 45M WACC = 12.5%*15M/(15M*2.75 + 2M*10 + 45M)+8.5%*2M/(15M*2.75 + 2M*10 + 45M) + 7%*45M/(15M*2.75 + 2M*10 + 45M) There are 3 different components, with respect to the common shares, preferred shares and debt components. It's just a weighted average cost of each category of capital. Hope this helps.

  7. anonymous
    • 5 years ago
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    Michael is almost right... Just remember to multiply the cost of debt (7%) by (1-tax rate)

  8. anonymous
    • 5 years ago
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    Ah right. Thank you Prof.

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