Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. 1. full house co. has the following information: -

1. Full House Co. has the following information: -Beta=1.2, Market Risk Premium= 7%, Risk free rate...

Free

80.2K

Verified Solution

Question

Finance

1. Full House Co. has the following information:

-Beta=1.2, Market Risk Premium= 7%, Risk free rate = 3%

-A current price of common stock of $60/share, with 100,000shares outstanding

-A preferred dividend of $10 with a current price of preferredstock of $100, and 10,000 shares outstanding

-5000 outstanding bonds with 20 years to maturity, paying a 5%coupon, and a current price of $1150 and 6000 outstanding bondswith 10 years to maturity, paying a 4%, and a current price of$1041.67

-Full House’s Tax Rate is 21%

Find the WACC for Full House Inc.

**please post STEP BY STEP instructions

Answer & Explanation Solved by verified expert
4.4 Ratings (687 Votes)

A) COMPONENT COST OF CAPITAL:
1) Cost of common stock per CAPM = risk free rate+beta*market risk premium = 3%+1.2*7% = 11.40%
2) Cost of preferred stock = Dividend/Price = 10/100 = 10.00%
3) Cost of debt:
a) 1st Bond:
Before tax cost of debt = YTM.
YTM using a calculator = 3.91%
After tax cost of debt = 3.91%*(1-21%) = 3.09%
b) 2nd Bond:
Before tax cost of debt = YTM.
YTM using a calculator = 3.50%
After tax cost of debt = 3.50%*(1-21%) = 2.77%
B) WACC:
Component Market Value Weight Component Cost WACC
Common stock [100000*$60] $6000000 31.58% 11.40% 3.60%
Preferred stock [10000*$100] $1000000 5.26% 10.00% 0.53%
Debt:
1st Bond [5000*1150] $5750000 30.26% 3.09% 0.93%
2nd Bond [6000*1041.67] $6250020 32.89% 2.77% 0.91%
Total $19000020 100.00% 5.97%
WACC = 5.97%

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

1. Full House Co. has the following information:-Beta=1.2, Market Risk Premium= 7%, Risk free rate = 3%-A current price of common stock of $60/share, with 100,000shares outstanding-A preferred dividend of $10 with a current price of preferredstock of $100, and 10,000 shares outstanding-5000 outstanding bonds with 20 years to maturity, paying a 5%coupon, and a current price of $1150 and 6000 outstanding bondswith 10 years to maturity, paying a 4%, and a current price of$1041.67-Full House’s Tax Rate is 21%Find the WACC for Full House Inc.**please post STEP BY STEP instructions

Other questions asked by students

Q

DOWN SYNDROME Describe the inheritance pattern (single gene mendelian complex polygenic)

Medical Sciences
Q

QUESTION 28 When providing group incentives, individual efforts and results may get “lost” in the group. True False 2 points...

General Management
Q

Finco Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...

Finance
Q

7 If E is the amount of energy released radioactive element having mass number A...

Physics
Q

A town's population increases at a constant rate. In 2010 the population was 12,044. By...

Basic Math
Q

L purchased. MII-28. Using Statement of Cash Flow Information to Assess...

Accounting
Q

(c) At what rate does the factory's cost increase for every additional chair produced

Accounting
Q

Pastore Inc. granted options for 1 million shares of its $1 par common stock at...

Accounting
Q

On July 2, 2021, Whispering Company sold to Sue Black merchandise having a sales price...

Accounting
Q

Breakeven cash inflows and risk Blair Gases and Chemicals is a supplier of highly purified...

Accounting
Q

Question 19 0.5 pts Which of the following statements is FALSE? Because long-term investors can...

Finance
Q

The Down and Out Co. just issued a dividend of $0.56 per share on its...

Finance