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

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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%

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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

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