The Tating Company has 2,500 bonds outstanding that are selling for $1,160 each and has a floatation cost of 2%, the

Question

The Tating Company has 2,500 bonds outstanding that are selling for $1,160 each and has a floatation cost of 2%, the bond pays 7% coupon paid semiannually for 30 years . The company also has 5,000 shares of preferred stock at a market price of $30 each and floatation cost of 3 dollars with par value of 90 dollars and pay dividends of 10%. The common stock is priced at $26 a share undervalued by 2 dollars and there are 36,000 shares outstanding last dividends was 3 dollars and growth rate is 5% Tax rate is 30% What is the after tax cost of debt What is the cost of preferred stock What is the cost of common stock What is the weight of DEBT ,P.S,C.S What is the firm's weighted average cost of capital?

Help In Homework · Accepted Answer

MV of equity=Price of equity*number of shares outstanding MV of equity=26*36000 =936000 MV of Bond=Par value*bonds outstanding*%age of par MV of Bond=1000*2500*1.16 =2900000 MV of Preferred equity=Price*number of shares outstanding MV of Preferred equity=30*5000 =150000 MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity =936000+2900000+150000 =3986000 Weight of equity = MV of Equity/MV of firm Weight of equity = 936000/3986000 W(E)=0.2348 Weight of debt = MV of Bond/MV of firm Weight of debt = 2900000/3986000 W(D)=0.7275 Weight of preferred equity = MV of preferred equity/MV of firm Weight of preferred equity = 150000/3986000 W(PE)=0.0376 Cost of equity As per DDM Price-flotation cost = recent dividend* (1 + growth rate )/(cost of equity - growth rate) 24-2 = 3 * (1+0.05) / (Cost of equity - 0.05) Cost of equity% = 18.13 Cost of debt K = Nx2 Bond Price *(1-flotation %) =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 k=1 K =30x2 1160*(1-0.02) =∑ [(7*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^30x2 k=1 YTM = 6.0103101302 After tax cost of debt = cost of debt*(1-tax rate) After tax cost of debt = 6.0103101302*(1-0.3) = 4.21 cost of preferred equity cost of preferred equity = Preferred dividend/price-flotation cost*100 cost of preferred equity = 9/(27-3)*100 =33.33 WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE) WACC=4.21*0.7275+18.13*0.2348+33.33*0.0376 WACC =8.57%

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The Tating Company has 2,500 bonds outstanding that are selling for $1,160 each and has a floatation cost of 2%, the bond pays 7% coupon paid semiannually for 30 years

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