Product has 2,500,000 shares of common stock outstanding

jagguarpaw January 12, 2017 0 Comments

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Question: Product has 2,500,000 shares of common stock outstanding

Product has 2,500,000 shares of common stock outstanding. The current share price is $26.54, and the book value per share is $11.27. Amaron also has two bond issues outstanding. The first bond issue has a face value (or book value) of $12,719,000 and a coupon rate of 7.10% and sells for 121.1% of PAR value. The second issue has a face value (or book value) of $4,314,000 and a coupon rate of 6.80% and sells for 116.0% of PAR value. The 7.10% coupon bond matures in 24 years, the 6.80% coupon bond matures in 12 years. Both bonds make semiannual payments. The tax rate is 32%.

Suppose stock has a beta of 1.2. The risk-free rate is 2.25%, and the market risk premium is 12.85%. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues.

WHAT IS THE WEIGHTED AVERAGE COST OF CAPITAL (WACC)

BOND DATA
  7.1% Coupon 6.80% Coupon
Face Value for book value $12,719,000 $4,314,000
Coupon rate 7.1% 6.8%
Bond price % of PAR 121.1% 116.0%
Term to maturity 24% 12
Tax rate 32% 32%

 

STOCK DATA
# shares outstanding 2,500,000
Market value per share $26.54
Book value per share $11.27
Beta 1.20
Risk free rate(rPM) 12.85%