5.    Wiggins & Co. is a large designer and manufacturer of fine British accoutrements, such as hats, ties, cuff links, umbrellas, and leather goods such as briefcases, satchels, and gloves.  Five years ago Wiggins issued 30-year debt with a face value of $1,000.  Today that debt is rated “A” by Standard and Poor’s and is priced at $842.38 in the market. The coupon rate is 10% per year and interest payments are made semiannually.  Wiggins’ stock, trading at $26 per share, just paid a $2.50 dividend and dividends are expected to grow 4% per year.  The firm’s beta is 1.50.  The risk-free rate is 2% and the expected return on the market is 10%. 

a. Find the yield-to maturity on the Wiggins debt.
b. Wiggins will issue new debt with the help of an investment bank who charges a 2.5% underwriting fee for each bond sold. Including the banker’s fee, what is Wiggins cost of debt (before tax).  The bond’s coupons are paid semiannually. Assume the new bonds being issued are 25-year bonds
c.  Using CAPM, calculate the firm’s cost of internal equity.
d. Using the dividend growth model, calculate the firm’s cost of internal equity

e. Suppose Barclays Capital, the firm’s investment bank charges a 4.8% underwriting fee to issue new shares.  What would the cost of equity be for Wiggins Inc. using the dividend growth model?

f. Assume the firm has a 25% tax rate and the firm’s target capital structure is 40% internal common equity (i.e., retained earnings), 30% external common equity (issue shares) and 30% debt.  Find the WACC for Wiggins Inc. 

Answer rating: 100% (QA)

a The yield to maturity of a bond is the rate of return that bondholders would earn on the bond investment if they hold the bond to maturity which can ... View the full answer