The Balance Sheet (book values) for WACC Enterprises is provided below. Balance Sheet of WACC Enterprises...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Balance Sheet (book values) for WACC Enterprises is provided below. Balance Sheet of WACC Enterprises 10,260,000 Debt 41,040,000 Preferred Equity Common Equity Current Assets 12,000,000 Fixed Assets 15,000,000 24,300,000 51,300,000 51,300,000 In addition, you are provided with the following additional information. Assume that the corporate tax rate is 34 percent. Debt: 12,000 bonds at a coupon rate of 8 percent are outstanding, $1,000 par/face value, 7 years to maturity, selling for 105 percent of par; the bonds make semi-annual payments. Flotation costs for new bonds are 4.00%. Preferred Stock: 150,000 shares of 7 percent preferred stock are outstanding, with a $100 par value and currently selling for $105 per share. Flotation costs are expected to be 5.00%. Common Stock: 937,500 shares outstanding, selling for $59 per share; the beta is 1.2. Flotation costs are expected to be 6.00%. Additionally, the most recent dividends received by the common shareholders was $3.00 per share. This dividend is expected to grow at a constant rate of 5 percent forever. Market: 5 percent market risk premium and 4 percent risk free rate a) What is the before-tax cost of debt? (2 marks) b) What is the cost of preferred shares? (1 marks) c) What is the firm's cost of equity using both the dividend growth model and the security market line? (2 marks) d) What is the firm's weighted average cost of capital? The cost of equity to use for the WACC should be based on the security market line approach. (2 marks) The Balance Sheet (book values) for WACC Enterprises is provided below. Balance Sheet of WACC Enterprises 10,260,000 Debt 41,040,000 Preferred Equity Common Equity Current Assets 12,000,000 Fixed Assets 15,000,000 24,300,000 51,300,000 51,300,000 In addition, you are provided with the following additional information. Assume that the corporate tax rate is 34 percent. Debt: 12,000 bonds at a coupon rate of 8 percent are outstanding, $1,000 par/face value, 7 years to maturity, selling for 105 percent of par; the bonds make semi-annual payments. Flotation costs for new bonds are 4.00%. Preferred Stock: 150,000 shares of 7 percent preferred stock are outstanding, with a $100 par value and currently selling for $105 per share. Flotation costs are expected to be 5.00%. Common Stock: 937,500 shares outstanding, selling for $59 per share; the beta is 1.2. Flotation costs are expected to be 6.00%. Additionally, the most recent dividends received by the common shareholders was $3.00 per share. This dividend is expected to grow at a constant rate of 5 percent forever. Market: 5 percent market risk premium and 4 percent risk free rate a) What is the before-tax cost of debt? (2 marks) b) What is the cost of preferred shares? (1 marks) c) What is the firm's cost of equity using both the dividend growth model and the security market line? (2 marks) d) What is the firm's weighted average cost of capital? The cost of equity to use for the WACC should be based on the security market line approach. (2 marks)
Expert Answer:
Answer rating: 100% (QA)
Solution aCalculation of beforetax cost of debt Net Proceed from bondSale price1Flotation cost 10001... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
Posted Date:
Students also viewed these accounting questions
-
Please prepare a 500 word essay with proper citations and references. Choose a product or service you have purchased or paid for, answer the following questions below putting in practice the customer...
-
Below is a partial balance sheet for Elizabeth Pie Co Assets Liabilities Accounts Receivable 1100000 Accounts Payable 1400000 Inventory 500000 Notes Payable 2800000 Property Plant Equip 6700000 Total...
-
The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows. The following errors in the corporations accounting have been discovered:...
-
PIM Industries, Inc., manufactures electronics components. Each unit costs $30 before the final test. The final test rejects, on average, 5 percent of the 50,000 units manufactured per year. The...
-
Although the elements of copywriting differ greatly for print and television ads, integrated brand promotion campaigns use both print and broadcast media alike to deliver consistent brand messages....
-
Ken Gorman is a maitre d' at Carmel Dinner Club. On February 5, his gross pay was $800 (three days working, one paid vacation day, and one paid sick day). He also reported to his employer tips of...
-
Use the all-possible-regressions selection on the wine quality of young red wines data in Table B.19. Perform a thorough analysis of the best candidate models. Compare your results with stepwise...
-
The Amberssen Specialty Company is a chain of 12 retail stores that sell a variety of imported gift items, gourmet chocolates, cheeses, and wines in the Toronto area. Amberssen has an IS staff of...
-
The Paige Company wants to develop a cost equation to determine its total electricity cost for a given month. It has determined that kilowatt hours used is the best predictor of electricity cost. It...
-
One model A1100 Kawasaki Jet Ski Personal Watercraft was sold for cash. This model retails for $9,375.00 plus 8% sales tax ($9,375.00 x 8% = $750.00). Invoice Number: G4011. Because a perpetual...
-
Problem 1.91: A thin rod of length L and uniform charge per unit length lies along the x-axis and is symmetrically placed about the origin. (a) Show that the field along the y-axis is in the y...
-
prepare a presentation to a Brazilian audience The manager of a Brazilian bank has approached your school about the possibility of sending 30 of its managers to your institution to pursue a...
-
1 C + R The perimeter of a rectangular pool is 92 metres. The length is 12 metres more than the width. Find the dimensions of the pool. Given the perimeter is P=2(L+W) Show a solution for full marks....
-
Use the quadratic formula to solve for x. 2 4x+9x+3=0
-
Mark plans to invest $5000 in a GIC for 4 years. He has a choice of 2 plans: Plan A: 6.75% compounded annually Plan B: 6.60% compounded quarterly In which plan should Mark invest? Explain.
-
Masbet Corporation has been a family owned company. While they are celebratingtheir 50th Anniversary the new generation of management wants to make somechanges in the way communication flows. Hence...
-
Some information is provided below about five different investment funds, each investing in a different portfolio of assets. The funds are based in the United States (US) and some additional...
-
Why is the national security argument for tariffs questionable?
-
During Year 1, Walters Company purchased 6,000 shares of Company A common stock for $25 per share and 10,000 shares of Company B common stock for $32 per share. These investments are classified as...
-
What two factors must be considered in deciding the point at which revenues and gains should be recognized? At what point in the revenue cycle are these conditions usually met?
-
What is the most common event that causes the accumulated depreciation account to increase? decrease?
-
What is the present value of the following future amounts? a. $805 to be received 10 years from now discounted back to the present at 10 percent b. $376 to be received 5 years from now discounted...
-
To what amount will the following investments accumulate? a. $6,000 invested for 12 years at 12 percent compounded annually b. $7,500 invested for 8 years at 8 percent compounded annually c. $6,400...
-
At what annual rate would the following have to be invested? a. \($820\) to grow to \($1,988.12\) in 13 years b. \($320\) to grow to \($423.10\) in 6 years c. \($57\) to grow to \($290.30\) in 18...
Study smarter with the SolutionInn App