Please show all your calculations. If you use a formula, show the formula used and also the formula with the numerical values. If you use a financial calculator, show the formula used, the formula with the numerical values, and the inputs.
a) Robin Corp. has $200 million face value of outstanding debt with a coupon of 4% and an annualized yield to maturity of 3%. The bonds make semi-annual payments and have 8 years to maturity. The firm also has one million 6% preferred shares outstanding with a face (par) value of $100. The preferred stock is trading at 110% of par value. In addition, the firm has 10 million shares of common stock with a book value of $25 per share. Robin just paid an annual dividend of $4 per share, and shareholders expect it to grow by one percent per year forever. The current beta of the common stock is 1.25. The Treasury bill rate is 2% and the return on the market proxy is 12%. Robin has a 40% tax rate. Calculate Robin’s weighted average cost of capital.
(PLEASE SHOW ALL STEPS WHEN CALCULATING BOND PRICE SPECIFICALLY)
b) Trans Continental Corporation (TCC) has an effective annual WACC of 9.60%. It is financed with 40% debt and 60% equity. TCC's effective annual cost of equity is 12.80% and its corporate tax rate is 40%. The debt issued by TCC is 30-year bonds, paying coupons annually at a coupon rate of 8%. Each TCC bond has a face value of $1,000. What is the value of each TCC bond? ( PLEASE SHOW ALL STEPS FOR THIS QUESTION)
c An analyst has obtained the following information about the Velo Co.: Book value of assets $25,000; book value of common equity $10,000; book value of preferred stock $5,000. The company has 4,000 common shares outstanding which are currently trading at $5 per share. The company has 3,000 preferred shares outstanding which are currently trading at $2 per share. The yield on the debt equals the coupon rate. The weights used to determine the weighted average cost of capital are: for common equity, preferred equity and debt
d) A firm’s WACC is estimated to be 10.56%, its cost of equity is Ke=14%, and it is subject to a 40% corporate income tax rate. The firm’s debt-to-equity ratio is D/ E = 2/3 . What is the firm’s after tax cost of debt?
e) Sparrow Corp. has $100 million face value of outstanding debt with a coupon of 10% and a yield to maturity of 8% (annualized). The bonds make semi-annual payments, and have 10 years to maturity. The company also has 1 million shares of common stock with book value per share of $35. The company presently pays an annual dividend of $5 per share, and investors expect it to experience a growth in dividends of 1% per annum for many years to come. The current beta of the stock is 1.5. The Treasury bill rate is 5%, and the market risk premium is 8.5%. Sparrow Corp. has 50,000 preferred shares outstanding, with a face value of $100 and a 6% preferred dividend rate. The preferred stock is trading at $105. The company is in the 40% tax bracket. What is the company’s current weighted average cost of capital? (Assume that the common stock price lies on the SML)