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Finance Homework Help - Please.

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turducken
Posts: 749 - Karma: 601
Hello NS. Anyone here study/studied finance and would be willing to give me a few pointers please? I was given a question I need to answer. I'm comletely lost and have no idea how to answer it and thought I'd come see you for advice. Any help would be great thanks.




Example: Executive Fruit has issued debt, preferred stock and common stock. The market value of these securities are $4mil, $2mil and $6mil. The yield to maturity on their debt is 6%, the current price of preferred stock is $100 and the expected preferred stock dividend is $12. The risk free rate is 4%, the expected return on market is 12% and the Beta on common equity is 1.75. The marginal tax rate is 35%.

- Determine the the Weighted Average Cost of Capital for Executive Fruit.



Thanks.
Oct 20 2014 11:34PM
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--ski--
Posts: 1670 - Karma: 817
12.29%
Oct 20 2014 11:39PM
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turducken
Posts: 749 - Karma: 601
--ski--12.29%


Holy shit. Thanks. That was quick. Would you mind telling me a few tips to how you worked that out please?
Oct 20 2014 11:44PM
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Sno.
Posts: 12155 - Karma: 6,147
no, its not 12.9%, its 13.1%
Oct 20 2014 11:50PM
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--ski--
Posts: 1670 - Karma: 817
Paedophile-PopeHoly shit. Thanks. That was quick. Would you mind telling me a few tips to how you worked that out please?


How? I said the first analyst to solve this gets to go home.

Sno.no, its not 12.9%, its 13.1%


It better not be. I already sent the cunt home.
Oct 21 2014 12:00AM
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Sno.
Posts: 12155 - Karma: 6,147
lolol
Oct 21 2014 12:05AM
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--ski--
Posts: 1670 - Karma: 817
Step 1 – Calculate Weights.

Firm Value = $12mil.
Debt : 4/12 = .333
CS = 6/12 = .5
PS = 2/12 = .1666

Step 2 – Required Rates.

Debt = YTM = 6%
PS = Dp/Pp = 12%
CS = CAPM
= Re=Rf + Beta(Rm – Rf)
= .04 + 1.75(.12-.04)
= 18%

Step 3 – Calculate WACC.

.333(.06)(1-.35) + .1666(.12) + .5(.18)
= 12.29%

Actually, I think that little bastard was right. Anyhow, It's 5am, I've we've worked almost twenty hours straight and my brain is a ball of mush.
Oct 21 2014 12:10AM
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turducken
Posts: 749 - Karma: 601
Thanks for the help. I'll let you know what if the answer is wrong ha. Thanks.
Oct 21 2014 7:47PM
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Hodor
Posts: 503 - Karma: 2,578
just do what real finance experts do and cheat and then lie about it
Oct 21 2014 11:29PM
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