Finance Homework 12 Questions and CORRECT answers

Finance Homework 12 You are given the following information concerning Around Town Tours: Debt:7,500, 6.8 percent coupon bonds outstanding, with 11 years to maturity and a quoted price of 97.9. These bonds pay interest semiannually. Common stock:284,000 shares of common stock selling for $68 per share. The stock has a beta of 1.04 and will pay a dividend of $2.62 next year. The dividend is expected to grow by 2.5 percent per year indefinitely. Preferred stock:9,000 shares of $8 preferred stock selling at $88 per share. Market:14.6 percent expected return, 4.1 percent risk-free rate Company:34 percent tax rate. Calculate the WACC for this firm. 10.0 percent 9.6 percent 8.7 percent 9.0 percent 9.4 percent ANSWER: 9.0% Common: 284,000 × $68 = $19,312,000 Preferred: 9,000 × $88 = $792,000 Debt: 7,500 × .979 × $1,000 = $7,342,500 Value = $19,312,000 + 792,000 + $7,342,500 = $27,446,500 RE = .041 + 1.04(.146-.041) = .1502 RE = ($2.62 /$68) + .025 = .0635 Average RE = (.1502+ .0635)/2 = .1069 RP = $8/$88 = .0909 $979 = [(.068 × $1,000) / 2] × ({1- 1 / [1 + (r/ 2)]22} / (r / 2)) + $1,000 / [1 + (r / 2)]22 r = 7.08 percent WACC = ($19,312,000/$27,446,500)(.1069) + ($792,000/$27,446,500)(.0909) + ($