Question

You are given the following information concerning Parrothead Enterprises:

1. Debt: 8,800 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 107.50. These bonds have a par value of $2,000 and pay interest semiannually.
2. Common stock: 295,000 shares of common stock selling for $65.90 per share. The stock has a beta of 1.04 and will pay a dividend of $4.10 next year. The dividend is expected to grow by 5.4 percent per year indefinitely.
3. Preferred stock: 9,400 shares of 4.70 percent preferred stock selling at $95.40 per share.
4. Market: 10.6 percent expected return, a risk-free rate of 4.30 percent, and a 24 percent tax rate.
Required:
(a) Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

7.85%

Step-by-step explanation:

Face value of bond =$2000

Price of current bond= face value× 106.5% = $2130

Term= 25 years×2= 50 period

Coupon rate= 7%×1/2= 3.5%

Coupon amount= coupon rate×face value = $2000×3.5/100

=$70 for a period

YTM of bond= [coupon amount+ (maturity value-current price)/Term]/0.6×current price+0.4×maturity value]

YTM of bond= 6.487% per annum

Total market value of bond= 8,400bonds× $2130= $17,892,000

Market value of common stock= 275,000shares × 62.50= $18012500

Weight of common stock= 0.490009385

Weight of preferred stock= 0.023259294

WACC= Wd* Kd + Wc*Kc + Wp*Kp

= 0.486731321× 4.86525% +

0.490009385× 10.9624275+

0.023259294× 4.7368421%

=7.849%

= 7.85%(rounded)

Thus, WACC is 7.85%