Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
thumb_up100%
Chapter 12, Problem 18QP
Calculating the WACC. You are given the following information concerning Parrothead Enterprises:
| Debt: | 13,000 6.2 percent coupon bonds outstanding, with 15 years to maturity and a quoted price of 107. These bonds pay interest semiannually. |
| Common stock: | 345,000 shares of common stock selling for $73.50 per share. The stock has a beta of .90 and will pay a dividend of $3.35 next year. The dividend is expected to grow by 5 percent per year indefinitely. |
| 10,000 shares of 4.1 percent preferred stock selling at $86 per share. | |
| Market: | 12 percent expected return, risk-free rate of 3.5 percent, and a 35 percent tax rate. |
Calculate the WACC for Parrothead Enterprises.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are given the following information on Parrothead Enterprises:
Debt:
9,300 6.5 percent coupon bonds outstanding, with 22 years to
maturity and a quoted price of 104.75. These bonds pay interest
semiannually and have a par value of $1,000.
Common stock: 240,000 shares of common stock selling for $64.80 per share. The
stock has a beta of .93 and will pay a dividend of $3.00 next year. The
dividend is expected to grow by 5.3 percent per year indefinitely.
Preferred stock: 8,300 shares of 4.65 percent preferred stock selling at $94.30 per
share. The par value is $100 per share.
Market:
11.7 percent expected return, risk-free rate of 3.75 percent, and a 23
percent tax rate.
Calculate the company's WACC. (Do not round intermediate calculations and enter
your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
WACC
%
You are given the following information concerning Parrothead Enterprises:
Debt:
9,300 6.5 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 104.75. These bonds have a par value of $1,000 and pay interest semiannually.
Common stock:
240,000 shares of common stock selling for $64.80 per share. The stock has a beta of .93 and will pay a dividend of $3.00 next year. The dividend is expected to grow by 5.3 percent per year indefinitely.
Preferred stock:
8,300 shares of 4.65 percent preferred stock selling at $94.30 per share.
Market:
11.7 percent expected return, a risk-free rate of 3.75 percent, and a 23 percent tax rate.
What is the firm's cost of each form of financing? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
You are given the following information concerning Parrothead Enterprises:
Debt:
9,200 6.4 percent coupon bonds outstanding, with 23 years to
maturity and a quoted price of 104.50. These bonds have a par value
of $1,000 and pay interest semiannually.
Common stock: 235,000 shares of common stock selling for $64.70 per share. The
stock has a beta of .92 and will pay a dividend of $2.90 next year. The
dividend is expected to grow by 5.2 percent per year indefinitely.
Preferred stock: 8,200 shares of 4.60 percent preferred stock selling at $94.20 per
share.
Market:
11.8 percent expected return, a risk-free rate of 3.70 percent, and a 22
percent tax rate.
What is the firm's cost of each form of financing? (Do not round intermediate
calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,
32.16.)
Aftertax cost of debt
%
Cost of preferred stock
%
Cost of equity
%
Calculate the WACC for the company. (Do not round intermediate calculations and
enter your answer as a…
Chapter 12 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 12.1 - What is the primary determinant of the cost of...Ch. 12.1 - What is the relationship between the required...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Prob. 12.2BCQCh. 12.3 - Prob. 12.3ACQCh. 12.3 - Prob. 12.3BCQCh. 12.3 - Prob. 12.3CCQCh. 12.4 - Prob. 12.4ACQCh. 12.4 - Why do we multiply the cost of debt by (1 TC)...Ch. 12.4 - Under what conditions is it correct to use the...
Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - Prob. 12.6ACQCh. 12.6 - Prob. 12.6BCQCh. 12 - Section 12.1What are the components used to...Ch. 12 - Prob. 12.2CCh. 12 - Prob. 12.3CCh. 12 - Prob. 12.4CCh. 12 - Section 12.5True or False: Projects should always...Ch. 12 - WACC. On the most basic level, if a firms WACC is...Ch. 12 - Prob. 2CTCRCh. 12 - Project Risk. If you can borrow all the money you...Ch. 12 - LO4 12.4WACC and Taxes. Why do we use an aftertax...Ch. 12 - DGM Cost of Equity Estimation. What are the...Ch. 12 - Prob. 6CTCRCh. 12 - Prob. 7CTCRCh. 12 - Prob. 8CTCRCh. 12 - Prob. 9CTCRCh. 12 - Prob. 10CTCRCh. 12 - Prob. 1QPCh. 12 - Calculating Cost of Equity. Halestorm Corporations...Ch. 12 - Calculating Cost of Equity. Stock in CDB...Ch. 12 - Estimating the DCF Growth Rate. Suppose Hornsby...Ch. 12 - Prob. 5QPCh. 12 - LO2 6Calculating Cost of Debt. ICU Window, Inc.,...Ch. 12 - LO2 7Calculating Cost of Debt. Jimmys Cricket Farm...Ch. 12 - Calculating Cost of Debt. For the firm in Problem...Ch. 12 - Calculating WACC. Bargeron Corporation has a...Ch. 12 - Prob. 10QPCh. 12 - Prob. 11QPCh. 12 - Book Value versus Market Value. Bonaime, Inc., has...Ch. 12 - Calculating the WACC. In Problem 12, suppose the...Ch. 12 - WACC. Clifford, Inc., has a target debtequity...Ch. 12 - Prob. 15QPCh. 12 - Finding the WACC. Hankins Corporation has 5.4...Ch. 12 - SML and WACC. An all-equity firm is considering...Ch. 12 - Calculating the WACC. You are given the following...Ch. 12 - Calculating Capital Structure Weights. Liu...Ch. 12 - Calculating the WACC. Gnomes R Us is considering a...Ch. 12 - Prob. 21QPCh. 12 - Calculating the Cost of Debt. Ying Import has...Ch. 12 - Prob. 23QPCh. 12 - Adjusted Cash Flow from Assets. Ward Corp. is...Ch. 12 - Adjusted Cash Flow from Assets. In the previous...Ch. 12 - Prob. 26QPCh. 12 - WACC and NPV. Photochronograph Corporation (PC)...Ch. 12 - Project Evaluation. This is a comprehensive...Ch. 12 - Prob. 1CCCh. 12 - Cost of Capital for Layton Motors You have...Ch. 12 - Prob. 3CCCh. 12 - Prob. 4CCCh. 12 - Prob. 5CC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You are given the following information on Parrothead Enterprises: Debt: 8,500 7.1 percent coupon bonds outstanding, with 24 years to maturity and a quoted price of 106.75. These bonds pay interest semiannually and have a par value of $2,000. Common stock: 280,000 shares of common stock selling for $65.60 per share. The stock has a beta of 1.06 and will pay a dividend of $3.80 next year. The dividend is expected to grow by 5.1 percent per year indefinitely. Preferred stock: 9,100 shares of 4.55 percent preferred stock selling at $95.10 per share. The par value is $100 per share. Market: 10.9 percent expected return, risk-free rate of 4.15 percent, and a 21 percent tax rate. Calculate the company's WACC.arrow_forwardYou are given the following information on Parrothead Enterprises: Debt: 9,400 6.6 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 105. These bonds pay interest semiannually and have a par value of $1,000. Common stock: 245,000 shares of common stock selling for $64.90 per share. The stock has a beta of .94 and will pay a dividend of $3.10 next year. The dividend is expected to grow by 5.4 percent per year indefinitely. Preferred stock: 8,400 shares of 4.7 percent preferred stock selling at $94.40 per share. The par value is $100 per share. Market: 11.6 percent expected return, risk-free rate of 3.8 percent, and a 24 percent tax rate. Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.arrow_forwardYou are given the following information on Parrothead Enterprises: Debt: 9,200 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 108.5. These bonds pay interest semiannually and have a par value of $2,000. Common stock: 315,000 shares of common stock selling for $66.30 per share. The stock has a beta of 1.08 and will pay a dividend of $4.50 next year. The dividend is expected to grow by 5.3 percent per year indefinitely. Preferred stock: 9,800 shares of 4.65 percent preferred stock selling at $95.80 per share. The par value is $100 per share. Market: 10.2 percent expected return, risk - free rate of 4.5 percent, and a 23 percent tax rate. Calculate the company's WACC.arrow_forward
- Reiterpallasch Inc. has provided you the following data: the company expects to pay a dividend of $0.65 at the end of the year, and the dividend is expected to grow at a constant rate of 6.00% per year, the current price of a share of stock is $16.00 per share, and the flotation cost for issuing new shares is 10.00%. The yield on the company's outstanding bonds is 7.75%, and the tax rate is 25%. The target capital structure consists of 40% debt, with the remainder consisting of common equity. Assuming the company MUST issue new stock to finance its capital budget, what is the company's WACC?arrow_forwardYou have the following information about a company:Debt: 5,000 3% bonds with twelve years to maturity. The face value of the bond is $1000. The bonds currently sell for $1190 and the bonds make semi-annual paymentsEquity: 125,000 shares outstanding selling for $65 per share. The beta is 1.35. The last dividend paid was $3.25.Market: There is a 5% market risk premium. The risk free rate is 2%. The corporate tax rate is 25%Given the above information, calculate the firm’s WACC.arrow_forwardJasper's, Inc. is expected to pay an annual dividend of $1.21 per share next year. This dividend is expected to increase by 3.5 percent annually. Jasper's also pays a 6 percent, annual coupon on its outstanding bonds. These bonds mature in 12.5 years and have a face value of $1,000. The firm's stock has a beta of 1.38 and a market price of $42.60 a share. The bonds are priced at $1,064 each. The market risk premium is 9.5 percent, the risk-free rate is 3.7 percent, and the tax rate is 32 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.36? A) 9.46 percentB) 9.58 percentC) 9.64 percentD) 9.69 percentarrow_forward
- Calculate the WACC for the following. Assume the tax rate to be 21%. Debt: 16,000 6.2% coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108% of par; the bonds make semiannual payments Common stock: 535,000 shares outstanding, selling for $81 per share; beta is 1.2. Preferred stock: 20,000 shares of 4.2% preferred stock outstanding, currently selling for $92 per share. Par value is $100. Market: 7% market risk premium and 3.1% risk free ratearrow_forwardYou are given the following information for Tara Ita Power Co. Assume the company’s tax rate is 22 percent. Debt: 5,000 6.6 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 109 percent of par; the bonds make semiannual payments. Common stock: 380,000 shares outstanding, selling for $56 per share; the beta is 1.12. Market: 5 percent market risk premium and 4.6 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardYou are given the following information for Cleen Power Co. Assume the company’s tax rate is 30 percent. Debt: 6,000 7.9 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 510,000 shares outstanding, selling for $69 per share; the beta is 1.12. Market: 10 percent market risk premium and 5.9 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %arrow_forward
- The stock of Alpha Tool sells for $81.20 per share. Its current dividend rate, D0, is $3 per share. Analysts and investors expect Alpha to increase its dividends at a 20 percent rate for each of the next 2 years. This annual dividend growth rate is expected to decline to 17 percent for years 3 and 4 and then to settle down to 13 percent per year forever. Calculate the cost of internal equity for Alpha Tool. Use Table II for your calculations. Round your answer to the nearest whole number. %arrow_forwardAn analyst has collected the following information regarding Christopher Co.: · The company's capital structure is 70 percent equity, 30 percent debt. · The yield to maturity on the company's bonds is 5 percent. · The company's year-end dividend (D1) is forecasted to be $0.8 a share. · The company expects that its dividend will grow at a constant rate of 5 percent a year. · The company's stock price is $25. · The company's tax rate is 40 percent. · The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's cost of new equity. Round it to two decimal places.arrow_forwardCalculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? Blooming Ltd. currently has the following capital structure: Debt:$2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years.Ordinary shares:65,000 outstanding ordinary shares. Thefirm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely.Preferredshares: 40000 outstanding preferred shares with face value of $100,paying fixed dividend rate of 14%.Company tax rate is 30%. Required: Complete the following taskarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY