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linda_us, Master's Degree
Category: Business and Finance Homework
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To finance the purchase, Ranch Manufacturing will sell 10-year

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To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.6% per year at the market value of the firm's capital structure as follows:
Bonds $4,400,000
Preferred Stock $2,500,000
Common Stock $5,900,000

To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.6% per year at the market price of $1,054. Preferred stock paying a $1.95 dividend can be sold for $25.76. Common stock for Ranch Manufacturing is currently selling for $54.96 per share and the firm paid a $2.91 dividend last year. Dividends are expected to continue growing at a rate of 4.6% per year into the indefinite future. If the firm's tax rate is 30%, what is their WACC?

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Customer: replied 2 years ago.
Hi Linda,

Thank you for your reply. Can you give me more detail on the bond calculation? I do not have a financial calculator and need to perform this calculation manually.

Thank you.
I have used the Rate formula in Excel. We can use the Approximate yield formula or long formula (where we equate cash inflows to cash outflows).

Refer this link for Approximate Yield formula

For long formula we will need to solve the following equations

1054 = 66/(1+r) + 66/(1+r)^2 + 66/(1+r)^3 + 66/(1+r)^4 + 66/(1+r)^5 + 66/(1+r)^6 + 66/(1+r)^7 + 66/(1+r)^8 + 66/(1+r)^9 + 66/(1+r)^10 + 1000/(1+r)^1000.

Solving by Approximate formula we give us a approximate result and will not be 100% accurate and solving by long formula is also a tedious process and we might have to try various figure (we still can make mistake or not arrive at correct answer).

I have done this questions atleast 50 time and even a small difference in answer (say .002%) would also be recognized as incorrect answer so the best way to solve is use excel or financial calculator.

I hope this helps. Let me know if you need any further clarification.
Customer: replied 2 years ago.

Got it. I see you put the formulas in the spreadsheet you provided. Thank you so much!

Customer: replied 2 years ago.

I have another question that I'd like you to help me learn the process of solving, if you're available.

I am available and would be happy to help.

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