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The Tating Company has 1
The Tating Company has 1.500 bonds outstanding that are selling for $1,160 each and has a floatation cost of 2%, the bond pays 7% coupon paid semiannually for 20 years. The company also has 5,000 shares of preferred stock at a market price of $32 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% Time left 0:39:55 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
Expert Solution
| Cost Debt after tax ={ I(1-t) +(RV-NP)/n } / (RV+NV)/2 |
I = Interest payment = $ 1000*3.5%= 35
NP = Net proceeds from debentures in case of new issue of debt or Current market price in case of existing debt. =$ 1,160 -(1000*2%) = $1,160 - 20 = $1,140
RV= Redemption value of debentures = $1,000
t = Tax rate applicable to the company =30%
n = Remaining life of debentures.=20 years *2 =40 periods( as it is semiannually cupon)
= {35(1-30%) + (1000 -1140/40) }/ (1140+1000)/2
=( 24.5 - 3.5) / 1070
=0.019
=1.96%
Calculation of Cost of preffered stock :-
Cost of preffered Stock ={PD +(RV-NP)/n } / (RV+NV)/2
PD = Annual Preferrence Dividend = $90 * 10% =$ 9
NP = Net proceeds from preferred stock = $32- 3 =$29
RV= Redemption value of preferred stock = $ 90
n = Remaining life of Preffered stock.= as there is ni life given, Hence maximum life of redemption will be 20 yrs
= 9 +(90-29)/20 / (90+29/2)
=9+3.05/59.5
=20.25%
Calculation of Cost of Common stock:-
Cost of Equity = (D1/P0) +g
D1 =next expected Dividend = 3(1+5%)= $3.15
P0 = Current Market Price = $ 26
g =growth rate = 5%
= (3.15/26)+0.05
=0.121+0.05
=17.1%
Calculation of WAAC:-
| WACC is weighted Average cost of securities in that portfolio | ||||||
| Source | Qty | Price | Value | Weight | Cost after Tax | Weighted Cost |
| Debt | 1500 | $ 1,160.00 | $ 17,40,000.00 | 0.6135 | 1.96% | 1.20% |
| Preferred Stock | 5000 | $ 32.00 | $ 1,60,000.00 | 0.0564 | 14.18% | 0.80% |
| Equity Stock | 36000 | $ 26.00 | $ 9,36,000.00 | 0.3300 | 11.97% | 3.95% |
| WACC | 5.95% |
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