Corporate Bonds

Archive for January, 2010

Question: What is the firms Weighted Average Cost of Capital? HELP PLEASE!?

Company has 100,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 7.5 percent. Company also has 1 million shares of 10.5% preferred stock outstanding and 5 million shares of common stock outstanding. Preferred stock sells for $56/share. Common stock has a beta of 1.2 and sells for $38/share. The U.S. treasury bill is yielding 3% and the return on the market is 12%. The corporate tax rate is 34%. What is the companys weighted average cost of capital?!?!?

Answer: Sure. You have everything you need to figure it out here. Bonds usually have a $1,000 par value so with 100,000 bonds outstanding, that makes $100 million. Preferred stock is $56 x 1,000,000 shares for $56 million and common stock is $38 x 5,000,000 shares for $190 million. That gives you the total capital of $346 million.

The cost of each type of capital is pretty straight forward. Debt's cost is 7.5% pre-tax (meaning you save the tax rate on that debt). So take the 7.5% x (1 - tax rate). In this case 7.5% x (1 - 34%) and with a little rounding you get 5% after tax cost of debt. Preferred stock has no tax advantage so the 10.5% is the cost of capital. Common stock you can use CAP-M in this case, to take the Rf + B x (Rm - Rf). So that is 3% + 1.2 x (12% - 9%) = 13.8%.

Then you weight each cost of capital by the proportion of the type of capital to total capital. So Wd = 100 / 346 = 28.9%. Wpref = 56 / 346 = 16.2%. We = 190 / 346 = 54.9%. Then you take each weight time the cost of capital of that capital type and sum the three numbers to get WACC. 28.9% x 5% + 16.2% * 10.5% + 54.9% x 13.8% = 1.4% + 1.7% + 7.6% = 10.7%.

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Question: Calculating Accrued Interest with BA II Plus?

Ok, so I'm trying to teach myself some extra bond analysis. Anyways, I'm trying to do the problem that is on Investopedia's website, but can't get the right answer. Question: On March 1, 2003, Francesca is selling a corporate bond with a face value of $1,000 and a 7% coupon paid semi-annually. The next coupon payment after March 1, 2003, is expected on June 30, 2003. What is the interest accrued on the bond?

Answer: i got what you did