A firm has $7.9 Billion debt outstanding, with a yield to maturity of 5.2% and a coupon rate of 4.2%. They have 104 million preferred shares outstanding, currently trading at $85.45. They also have 355 million common shares outstanding, currently trading at $42 and the corporate tax rate is 22%. If the return on common stock (return on equity) is 9.8% and the return on preferred stock is 7.2% what is the Weighted Average Cost of Capital (WACC)?

A firm has $7.9 Billion debt outstanding, with a yield to maturity of 5.2% and a coupon rate of 4.2%. They have 104 million preferred shares outstanding, currently trading at $85.45. They also have 355 million common shares outstanding, currently trading at $42 and the corporate tax rate is 22%. If the return on common stock (return on equity) is 9.8% and the return on preferred stock is 7.2% what is the Weighted Average Cost of Capital (WACC)?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.7. There are 1 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm’s tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 2.0 Bonds, coupon = 6%, paid annually(maturity = 10 years, current yield to maturity = 7%) $ 10.0 Accounts receivable 5.0 Preferred stock (par value $10 per share) 3.0 Inventories 9.0 Common stock (par value $0.10) 0.1 Plant and equipment 22.0 Additional paid-in stockholders’ equity 8.9 Retained earnings 16.0 Total $ 38.0 Total $ 38.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s…
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