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WACC: Lavigne Wineries

LaVigne Wineries.
Capital Budgeting Case

LaVigne Wineries is capitalized as follows:

Book Value Market Value

Senior Bonds, coupon 10%, semi- $3,000,000 $3,714,173.27
annually, mature late 2016

Junior bonds, coupon 7%, semi- $2,000,000 $1,875,497.36
annually, mature late 2021

Common Stock, par value $10.00 $4,000,000 $9,000,000
per share. Recent dividend, $1.00,
estimated growth rate, 8%. The risk-
free rate is 5%, the market risk
premium is 6%, LaVigne's beta is
1.2.

Preferred stock $0.00 $0.00

Marginal tax rate (federal + state), 40%

Required:

Estimate Lavigne's weighted average cost of capital.

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Solution Preview

We need to compute the bond yields for both bonds:
For the Senior Bonds, PV = market value = -3,714,173.27
FV = book value = 3,000,000
Payment per period (6 months) = 3000,000*10%/2 = 150000
Number of periods = (2016-2003)*2 = 26
By a financial calculator, or EXCEL ...

Solution Summary

This solution explains how to estimate Lavigne's weighted average cost of capital

$2.19