Managers of Hardin Motor company have asked you to help them refine the estimate of their cost of capital. What you know is the following:

a.     The liability side of their most recent balance sheet looks like this:

                                                                             i.     Accounts Payable                      $213,750

                                                                           ii.      Accrued Expenses                     $9,680

                                                                         iii.     Short term Bank Loan               $10,000

                                                                         iv.     Total Current Liabilities              $233,430

                                                                           v.      Long Term Debt                        $96,233

                                                                         vi.     Common Stock                          $50,000

                                                                       vii.     Retained Earnings                     $247,567

                                                                     viii.      Total Shareholder Equity            $297,567

                                                                         ix.     Total Liab. plus Equity                 $627,230

b.     The Yield to Maturity on Hardin's long term debt is 8% with a coupon rate of 6% and maturity of 10 years. Interest expense on the income statement last year was $9,000.

c.      The equity beta for Hardin was 1.5.

d.     The tax rate is 21%.

e.     The risk free rate (10 year Treasury) is 3.5%

f.       The Market Risk Premium is 6.6%.

g.     The ratio of Market Value to Book Value of equity is 3.

h.      Using market value weights, estimate Hardin's weighted average cost of capital.

Answer rating: 100% (QA)

To estimate Hardin Motor Companys weighted average cost of capital WACC using market value weights w... View the full answer