The Following Information Is Available Concerning a Firm's Capital

question 155

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

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Definitions:

Activity Level

A measure of the volume of production or operations, often influencing costs and used to adjust budgets or forecasts in business.

Net Operating Income

The profit realized from a business's operations after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS).

Planning Budget

A budget created at the beginning of the planning period that is based on projected levels of activity.

Revenue

The total amount of money received by a company from its sales of goods or services, before any expenses are subtracted.