Air University

BS Accounting & Finance 7

Financial Modelling

Quiz 2

Problem 1.

Equity

 # of share outstanding – 5,000,000

 Market price – $ 23.5
 Last Dividend – $ 0.75
 Expected growth – 6.5% per year

Preferred Stock
 # of share outstanding – 1,000,000
 Market price – $ 120
 Dividend – 5.5% per year for 1st 3 years and 7.5% for last 3 years
 Maturity period – 6 years
 Redemption price – 0.85 times of current market price plus last year’s dividend

Required
i. Calculate Pre-tax WACC? Mark 2.5
ii. Calculate Post-Tax WACC? Mark 2.0
iii. Calculate What is PV of redemption price of preferred share? Mark 2.5
iv. How much preferred shares should the company have for maintain a WACC of 6.5%? Mark 3.0

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