Book Value and Market Value Weights for Source of Capital Assignment | Homework For You
June 9th, 2020
- Solid Structures, Inc., a manufacturer of steel wire reinforcements and pre-stressed concrete strands for the concrete construction industry, wants to determine its WACC. Today, 1/1/2018, the firm issued 8,000 bonds that will mature in 1/1/2033 with $1,000 face value. These bonds will pay a 8% coupon rate quarterly and are currently selling for $945. The firm has 100,000 preferred shares of stock outstanding with a book value of $40 per share, but currently selling for $50 per share. The most recent preferred and common dividends were $3 and $2.5 per share, respectively.
The firm’s EPS five years ago was $7.00 and it expects to increase its next dividend payment by the implied 5-year earnings per share growth rate. Flotation costs on debt, preferred equity and common equity are $30, $4, and $5 per share. The common stock is selling today for $60 with book value of $45 per share, and the firm’s tax rate and payout ratio are 40% and 25%, respectively. The firm has 200,000 shares of common stock outstanding.
- Calculate the book value and market value weights for each source of capital.
- Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity).
- Determine the WACC with retained earnings, and WACC with common stock using both the market and the book value weights.Get Finance homework help today
