Trivoli Company uses preferred Shares Common Shares and Debt

Trivoli Company uses preferred Shares, Common Shares, and Debt to finance its projects. Use the following information to calculate its WACC.
It plans to issue perpetual preferred stock with an $11.00 dividend. The preferred stock is currently selling for $97.00; but flotation costs will be 5% of the market price. Its Capital Structure consists of 13.62% of preferred shares. The total value of preferred shares is $92,150.
4 years ago, Trivoli sold an issue of bonds with 10-year maturity, $1000 par value, 10% coupon rate, and semiannual interest payments. Currently, interest rates are 6.00143745%. It has 300 Bonds outstanding.
Trivoli has 10,000 commons shares outstanding, with each worth $22.50 and the return on equity is 16%.
Trivoli’s tax rate is 40%. (HINT: You need to calculate the price of the bonds. Years to maturity on the bonds is 6 years, also remember that it is paid semiannually. Then add the total value of debt, to the total value of stock and preferred shares, so you can find the weights of debt and Equity)

Solution

First we will calculate price of bond

N= 6*2( semi annual Payment), I/Y= 6.00143745%/2= 3.00071873%, FV=1000, PMT= 10%/2*1000= $50

Find PV?

PV=Price=$1199

Value of debt= $1199*300

Value of debt=359700

Value of equity= 10000*22.5=225000

Total Value of Capital=Value of debt+ value of equity+ value of prefereed shares

=359700+225000+92150

Total Value of Capital=676850

Weight of debt= 359700/676850= 53.14%

Weight of equity= 225000/676850=33.24%

Weight of preferred shares= 13.62%

Cost of preferd shares= dividend per share/market price- flaotation cost

=11/(97-5%*97)

Cost of preferred shares=11.94%

WACC= Weight of equity*Cost of equity +Weight of preferred shares*Cost of preferred shares+ weight of debt*after tax cost of debt

=33.24%*16%+13.62%*11.94%+53.14%*(1-40%)*6.00143745%

WACC= 8.86%