You are given the following information concerning Around Town Tours:
Debt:
8,500,7.1 percent coupon bonds outstanding,with 14 years to maturity and a quoted price of 102.6.These bonds pay interest semiannually.
Common stock:
265,000 shares of common stock selling for $76 per share.The stock has a beta of 0.92 and will pay a dividend of $2.48 next year.The dividend is expected to grow by 4 percent per year indefinitely.
Preferred stock:
7,500 shares of 6 percent preferred stock selling at $88 per share.
Market:
A 13.2 percent expected return,a 4.5 percent risk-free rate,and a 34 percent tax rate.
Calculate the WACC for this firm.

Question

Quizplus · Accepted Answer

R_E = 0.045 + 0.92(0.132 - 0.045) = 0.12504R_E = ($2.48/$76) + 0.04 = 0.072632Average R_E = (0.12504 + 0.072632)/2 = 0.098836R_P = $6/$88 = 0.068182 WACC = ($20,140,000/$29,521,000)(0.098836) + ($660,000/$29,521,000)(0.068182) + ($8,721,000/$29,521,000)(0.068090)(1 - 0.34) = 8.22 percent

You Are Given the Following Information Concerning Around Town Tours