The Following Information Is Available Concerning a Firm's Capital

question 64

Essay

The following information is available concerning a firm's capital:
Debt : Five thousand bonds with a face value of $1000 and an initial 20-year term were issued five years ago with a coupon rate of 8%. Today these bonds are selling for $846.30.
Preferred stock : Twenty thousand shares of preferred stock paying an annual dividend of $9.50 are outstanding. The shares currently trade at $79.16.
Common equity : Two hundred thousand shares of common stock are outstanding which are now selling for $22.50 per share. An annual dividend of $1.70 was just paid and is expected to grow indefinitely at 6%.
Target capital structure : The firm's target capital structure is of 30% debt, 20% preferred stock, and 50% equity.
The firm can issue any type of security without paying floatation costs. The combined federal and state tax rate is 40%.
Calculate the firm's WACC based on its
a. Target capital structure and market returns
b. Market value based capital structure and market returns

---

Definitions:

Alpha Decay

A type of radioactive decay in which an atomic nucleus emits an alpha particle (2 protons and 2 neutrons), resulting in the formation of a new atom with a lower atomic number.

Heat Energy

A form of energy that is transferred between systems or objects with different temperatures, driving processes like evaporation and melting.

Cooling History

The record of the thermal evolution of a rock or planet, illustrating the rates of cooling over time.

Increase in Temperature

A rise in the heat content or thermal state of an object, substance, or atmosphere, often discussed in the context of climate change and global warming.