Review and explain the Weighted Average Cost of Capital (WACC) concepts as follows:
When writing your assignment, assume you are the CFO of Hankins Corporation. Given the key financial data below, perform a detailed and thorough financial
analysis (show and explain all calculations) that includes the following:
A) Describe the firm’s market value capital structure:
. What is the market value for each type of financing used by the firm: equity, preferred stock, and debt?
. What is the total market value for Hankins Corporation?
. What are the respective market value weights for each component of the firm’s financing (equity, preferred stock, and debt)?
B)If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s
cash flows? Hint: the firm’s WACC is the appropriate discount rate. Compute Hankins’ WACC:
. What is the cost of equity using CAPM?
. If the YTM of the bonds is 5.93%, and YTM represents the cost of debt, what is the after-tax cost of this debt?
. What is the cost of the firm’s preferred stock?
. Based on this information, what is the WACC for Hankins Corporation?
Key financial data for Hankins Corporation:
Common stock outstanding = 5.4 million shares; market value = $64/share; beta = 1.13
5.6% Preferred stock outstanding = 290,000 shares issued with par value = $100 each. Current market value of preferred stock = $103/share.
6.7% semi-annual bonds outstanding = 125,000 bonds issued with par value = $1,000 each; market value is 109% of par; all bonds mature in 20 years.
Market risk premium = 6.8%
T-bills current yield = 4.3%
Corporate tax rate = 34%
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