WACC and Market Capital Structure
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Calculate the following based on the information below:
1. The company's market capital structure.
2. The WACC the firm should use when evaluating a new investment by discounting the project's cash flow.
a. 7.5 million shares of common stock outstanding, and currently selling for $64 per share with a beat of 1.2
b. 500,000 shares of 7% preferred stock outstanding, and currently selling for $108 per share
c. 175,000 of 8.2 % semi-annual bonds outstanding, par value $1,000 each; with 15 years remaining to maturity; and currently selling for 96 % of par value.
d. The market risk premium is 6.8% and the risk free rate is 5.5%
e. Tax rate is 34%
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Solution Summary
The solution computes weighted average cost of capital along with calculating required rate of return for equity, weight of debt & equity.
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(1) The company's market capital structure is
Common Stock = $480m (7.5m * $64)
Preferred Stock = $54m ( 0.5m * $108)
Debt = $168m ( 0.175m ...
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