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Corporate Finance Homework
Corporate Finance Homework
11.
Calculating Cost of Debt:
Shanken Corp. issued a 30-year, 5.9 percent semiannual bond 6 years ago. The bond
currently sells for 108 percent of its face value. The company’s tax rate is 35 percent.
a. What is the pretax cost of debt?
1 − (1 + Rb )−T
]+
FV
P = C[
Rb (1 + Rb )T
FV = $1000
P = 108%×$1000 = $1080
5.9% × $1000
C= = $29.5
2
Rb
Semiannual → and T ×2
2
1 − (1 + Rb ÷ 2)−6×2
]+
1000
1080 = 29.5[
Rb ÷ 2 (1 + Rb ÷ 2)6 × 2
⟹ Rb = 0.0437
Pretax cost of debt is 4.37%.
b. What is the aftertax cost of debt?
12.
12. Preferred Stock and WACC The Saunders Investment Bank has the following
financing outstanding. What is the WACC for the company?
Debt: 50,000 bonds with a coupon rate of 5.7 percent and a current price quote of 106.5;
the bonds have 20 years to maturity. 200,000 zero coupon bonds with a price quote of
Preferred stock: 125,000 shares of 4 percent preferred stock with a current price of $79,
and a par value of $100.
Common stock: 2,300,000 shares of common stock; the current price is $65, and the
beta of the stock is 1.20.
The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the
risk-free rate is 4 percent.
Value Wi%
Total $247,625,000
Cost of capital:
Bond:
1 − (1 + Rb )−T
]+
FV
P = C[
Rb (1 + Rb )T
FV = $1000
1 − (1 + Rb ÷ 2)−40
]+
1000
1, 065 = 57 ÷ 2[
Rb ÷ 2 (1 + Rb ÷ 2)40
⟹ Rb = 0.0517
∗
Aftertax: Rb = Rb × (1 − tax rate) = 0.0517 × (1 − 0.4) = 0.031
Zero coupon bond:
FV
BTVN Buổi 2_Đoan Thanh 2
FV
P=
(1 + RB )T
P = $1000 ×17.5% = $175
FV = $1000
1000
175 =
(1 + RZB ÷ 2)60
⟹ RZB = 0.059
∗
Aftertax: RZB = RZB × (1 − tax rate) = 0.059 × (1 − 0.4) = 0.0354
Common stock:
Rs = Rf + β(Rm − Rf )
Rs = 0.04 + 1.2 × 0.07
⟹ Rs = 0.124
Preferred stock:
Dp
Rp =
P
P = $79
Dp = 4%×$100 = 4
4
Rp = = 0.0506
79
WACC
RW ACC = WD RD (1 + tc %) + WP RP + WS RS
RW ACC = 5.06% × 3.99% + 12.4% × 60.37% + 3.54% × 14.13% +
3.1% × 21.5% = 8.86%