LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162. It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at par but will incur flotation costs of $50 per bond (Hir the coupon rate on the new bonds = the YTM on existing bonds). The firr could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,00

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Chapter1: Investments: Background And Issues
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**LUVFINANCE, Inc. Weighted Average Cost of Capital (WACC) Estimation**

LUVFINANCE, Inc. is currently estimating its Weighted Average Cost of Capital (WACC) while operating at its optimal capital structure. Here are the details of its financial instruments:

1. **Bonds:**
   - Coupon Rate: 12%, paid semiannually
   - Current Maturity: 17 years
   - Current Selling Price: $1,162
   - Total Outstanding: 100,000 bonds
   - New Bonds: Issuable at 20-year maturity with $50 flotation costs per bond. The coupon rate on new bonds equals the Yield to Maturity (YTM) of existing bonds.

2. **Preferred Stock:**
   - Par Value: $100
   - Annual Dividend: 12%
   - Current Selling Price: $120
   - Total Outstanding Shares: 1,000,000

3. **Common Stock:**
   - Current Selling Price: $100 per share
   - Total Outstanding Shares: 5,000,000
   - Beta (β): 0.89

4. **Market Conditions:**
   - Risk-Free Rate: 3.54%
   - Market Risk Premium: 6%

5. **Tax:**
   - Firm’s Marginal Tax Rate: 40%

**Objective:**
The task is to compute the Weighted Average Cost of Capital (WACC) of the company, considering the costs and proportions of each type of capital component mentioned above.
Transcribed Image Text:**LUVFINANCE, Inc. Weighted Average Cost of Capital (WACC) Estimation** LUVFINANCE, Inc. is currently estimating its Weighted Average Cost of Capital (WACC) while operating at its optimal capital structure. Here are the details of its financial instruments: 1. **Bonds:** - Coupon Rate: 12%, paid semiannually - Current Maturity: 17 years - Current Selling Price: $1,162 - Total Outstanding: 100,000 bonds - New Bonds: Issuable at 20-year maturity with $50 flotation costs per bond. The coupon rate on new bonds equals the Yield to Maturity (YTM) of existing bonds. 2. **Preferred Stock:** - Par Value: $100 - Annual Dividend: 12% - Current Selling Price: $120 - Total Outstanding Shares: 1,000,000 3. **Common Stock:** - Current Selling Price: $100 per share - Total Outstanding Shares: 5,000,000 - Beta (β): 0.89 4. **Market Conditions:** - Risk-Free Rate: 3.54% - Market Risk Premium: 6% 5. **Tax:** - Firm’s Marginal Tax Rate: 40% **Objective:** The task is to compute the Weighted Average Cost of Capital (WACC) of the company, considering the costs and proportions of each type of capital component mentioned above.
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