The saunders investment bank has the following financing outstanding. debt: 120,000 bonds with a coupon rate of 8 percent and a current price quote of 110.0; the bonds have 20 years to maturity. 290,000 zero coupon bonds with a price quote of 17.5 and 30 years until maturity. preferred stock: 210,000 shares of 6 percent preferred stock with a current price of $70, and a par value of $100. common stock: 3,200,000 shares of common stock; the current price is $56, and the beta of the stock is 1.05. market: the corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent. what is the wacc for the company?

R_Wacc =  11,35% (48%) + 8,57% (4%) + 4,18% (35%) + 3,59% (13%) =      7,70%

Explanation:

Re:  11,35%  Cost of Common Equity  

Re:  8,57%  Cost of Preferred STOCK  

Re:  4,18%  Cost of Debt BONDS  

Rd:  3,59%  Cost of Zero BONDS  

Equity :  

$179,200,000   Market Value of the firm's Common Equity  

Preferred Stock:  

$14,700,000   Market Value of the firm's Preferred STOCK  

Debt bonds :  

$132,000,000   Market Value of the firm's Debt BONDS  

Zero bonds :  

$49,300,000   Market Value of the firm's ZERO BONDS  

V:   $375,200,000   E+D = Total Market Value of the firm's financing  

E/V:  48%  Percentage of financing that is Common Equity  

PS/V:  4%  Percentage of financing that is Preferred Stock  

DB/V:  35%  Percentage of financing that is Debt Bonds  

ZB/V:  13%  Percentage of financing that is Zero Bonds  

Tc:    40% Corporate tax rate  

Total Market Value      

Market value of debt  Bonds:  

120,000 x $1,000 x 110% = $132,000,000

Market value of debt Zero Coupon:  

290,000 x $1,000 x 17% =  $49,300,000

Market value of preferred stock:  

210,000 x $70 = $14,700,000

Market value of common stock:  

3,200,000 x $56 =  $179,200,000

TOTAL = $375,200,000

Using the CAPM model we can calculate the costo of equity:      

R =   0,04 + 1,05(0,07) =  11,35%  

The cost of debt is the YTM of the bonds, so:      

P0= $1,110 = $40(PVIFAR%,40) + $1,000(PVIFR%,40) =      

R =   6,97%    

The aftertax cost of debt is:      

R_Bonds :  (1 - 0,4) x (0,0697) =  4,18%  

The aftertax cost of zero coupon bonds is:        

Yield To Maturity = (Face Value/Current Bond Price)^(1/Years To Maturity)−1 =  5,98%

(Face Value/Current Bond Price) = '$1,000/$175           (1/Years To Maturity) = 1/30          

The aftertax cost of debt is:          

R_ZeroB : (1 - 0,4) x (0,0598) = 3,59%      

We can use the preferred stock pricing equation, which is the level perpetuity equation, so the required return on the company’s preferred stock is:      

Rp= D1/P0 =  $6/$70 = 8,57%  

Rp = Required Return   D1 = Dividend   P0 = Price    

Secured loans are protected by collateral security. examples: title loans where the borrower uses the car title as collateral security interest rates are lower and repayments are longer therefore risk is low as a collateral security is given as guarantee to the bank in case of failure to pay the loanunsecured loans are not protected by collateral security but it is given on the creditworthiness of the borrower, trusting that she/he will pay on time. examples; payday loans is a short term loan where the borrower lends money from the bank and pays is back when the borrower receives his/her wages.interest rates are high and repayments are shorter. but the risk is high as no collateral security is given as a guarantee to the bank for payment of the loan

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