Share
Explore BrainMass

# WACC

Consider the following firm's capital structure based on its market value.

Market Value Capital Structure

Bonds, coupon = 9% paid semi-annually, \$10.4 million

issued at par value.

Preferred stocks (par value = \$10) \$1.05 million

Common stocks (par value = \$2) \$21million

Total \$32.45 million

The bonds were issued 3 years ago with a maturity of 15 years and they are selling at \$1040 in the current market.

The preferred stock is currently traded at \$15 and pays a dividend of \$2 per share.

The common stock is currently selling for \$21 and its dividend is \$1.5 per share.

The common stock's dividend is expected to grow at a constant rate of 3%. The marginal tax rate of the firm is 35%.

a) Find the firm's WACC.

b) Suppose that the firm is considering taking a 2-year project that costs \$2 million. In order for this project to be acceptable, what should the minimum (annual) cash flow generated by this project be? Assume that the project has the same risk as the firm has.

#### Solution Preview

WACC
Consider the following firm's capital structure based on its market value.

Market Value Capital Structure

Bonds, coupon = 9% paid semi-annually, \$10.4 million

issued at par value.

Preferred stocks (par value = \$10) \$1.05 million

Common stocks (par value = \$2) \$21million

Total \$32.45 million

The bonds were issued 3 years ago with a maturity of 15 years and they are selling at \$1040 in the current market.

The preferred stock is currently traded at \$15 and pays a dividend of \$2 per share.

The common stock is currently selling for \$21 and its dividend is \$1.5 per share.

The common stock's dividend is expected to grow at a constant rate of 3%. The marginal tax rate of the firm is 35%.

a) Find the firm's WACC.

We need to calculate how much the bonds have been issued by using the formula as follows: -

where B is the issued price
C is the coupon payment
r is the discount or yield rate
n is the period

Because we need to find the yield to maturity, we need to ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate the firm's WACC.

\$2.19