Question

You are given the following information concerning Parrothead Enterprises:

Debt: 13,000 6.4 percent coupon bonds outstanding, with 15 years to maturity and a quoted price of 107. These bonds pay interest semiannually.
Common stock: 345,000 shares of common stock selling for $76.50 per share. The stock has a beta of .90 and will pay a dividend of $3.80 next year. The dividend is expected to grow by 5 percent per year indefinitely.
Preferred stock: 10,000 shares of 4.4 percent preferred stock selling at $86 per share.
Market: 11 percent expected return, risk-free rate of 3.6 percent, and a 22 percent tax rate.

Required:
Calculate the company's WACC.

Answer 1

To calculate the WACC of Parrothead Enterprises, we need to determine the weights of its debt, common stock, and preferred stock in its capital structure. We can use the formulas WACC = ((E/V) * Re) + ((D/V) * Rd) * (1 - T) to calculate the respective costs of equity and debt for the company. Finally, we can plug these values into the WACC formula to calculate the company's weighted average cost of capital.

Step-by-step explanation:

To calculate the WACC of Parrothead Enterprises, we need to determine the weights of its debt, common stock, and preferred stock in its capital structure. We can use the formulas WACC = ((E/V) * Re) + ((D/V) * Rd) * (1 - T) to calculate the respective costs of equity and debt for the company. The weights are calculated by dividing the market value of each component by the total market value of the company's capital structure. Finally, we can plug these values into the WACC formula to calculate the company's weighted average cost of capital.

Answer 2

Answer and Explanation:

Please find attached