Problem:
Your company has 14 million shares of common stock outstanding. The common stock currently sells for $34 per share and has a beta of 1.2. The market risk premium is 10.5 percent and T-bills are yielding 2.0 percent. Use the T-bill yield for the risk-free rate.
The company has 900,000 shares of preferred stock outstanding. The preferred stock currently sells for $60 per share and pays 6 percent dividend for each $100 face value.
The company also has 210,000 semiannual bonds outstanding with a 10% coupon interest rate and par value $1,000 each. The bonds have 15 years to maturity and sell for 91 percent of the par. The company's average tax rate is 34 percent.
Answer the following questions.
Question 1: What is the cost of common equity (RE) based on the CAPM?
Question 2: What is the cost of preferred stock (RP)?
Question 3: What is the pre-tax cost of bond (RD)?
Question 4: What is market value of common stocks (E)?
Question 5: What is market value of common stocks (E)?
Question 6: What is market value of preferred stocks (P)?
Question 7: What is market value of bonds (D)?
Question 8: What is total market value of the firm (V)?
Question 9: What are capital structure weights (WE, WP, and WD)?
Question 10: What is the weighted average cost of capital (WACC) of the company?
Note: Explain all calculation and formulas.