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Given the following information for Magrath Power Co
Given the following information for Magrath Power Co., find the various items below. Assume the firm's tax rate if 35%. Debt: 10,000 6.4% coupon bonds outstanding, $1,000 par value, 25 years to maturity, currently selling for 108% of par; the bonds make semi-annual coupon payments. Flotation Costs are insignificant Common Stock: 495,000 shares outstanding, currently selling for $63 per share, the beta is 1.15 Preferred Stock: 35,000 shares outstanding, currently selling for $72 per share, that pays a dividend of $2.52 per share. Flotation Costs are 1%. Market Information: 7% market risk premium and a 3.2% risk free rate. A. What is the firm's after-tax cost of debt? B. What is the firm's cost of common equity? C. What is the firm's cost of new preferred Shares? D. Calculate the weights for each of the forms of capital that you would use to calculate the Weighted Average Cost of Capital. E. What is the firms Weighted Average Cost of Capital (WACC)?
Expert Solution
1 Cost of debt =?
We need to find the YTM of the bond, we can use excel to find this
after-tax cost = 5.79% * (1-.35) = 3.763%
b) Cost of equity = Risk free+ beta *market risk premuim
= 3.2% + 1.15* 7%
= 11.25%
c) Cost of preferred stock = dividend/ price = 2.52/72 = 3.5%
d) Market value of debt = 10000* 1080 = 10800000
Market value of equity = 495000 * 63 =31185000
Market value of Preferred stock = 35000 *72 * .99 (adjustment for floatation cost) = 2494800
Weight of debt = 10800000/(10800000+31185000 +2494800) = .2428
Weight of equity = 31185000/ (10800000+31185000 +2494800) = .70
Weight of Preferred stock = 2494800/(10800000+31185000 +2494800) = .056
e) Wacc = cost* weight of debt + cost* weight of equity + cost * weight of preferred stock
= .70*11.25% + .056*3.5% + .2428* 3.763%
=8.98%
please see the attached file.
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