Sangria is a US-based company whose products aim to promote happy, low-stress lifestyles. Let's calculate the WACC
Question:
Sangria is a US-based company whose products aim to promote happy, low-stress lifestyles. Let's calculate the WACC of Sangria. Its accounting and market value balances are:
Value in books
Asset value = 1000
Debt value = 500
equity value = 500
Market value
1250 asset value
500 debt
750 equity
We calculate the market value of equity on Sangria's balance sheet by multiplying its current share price ($7.50) by 100 million, the number of shares outstanding. The company's future prospects are good, so the shares are trading above book value ($7.50 vs. $5.00 per share). However, interest rates have been stable since the company's debt was issued, and in this case, the book and market values of the debt are the same.
Sangria's cost of debt (the market interest rate on its existing debt and any new loans) is 6%. Its cost of capital (the expected rate of return required by investors in Sangria shares) is 12.4%.
The market value balance sheet shows assets worth $1.25 billion. Of course, we cannot observe this value directly, because the assets themselves are not traded. But we know what they're worth to debt and equity investors ($500 + 750 = $1.25 billion). This value is entered to the left of the market value balance.
Indentation is consistently profitable and is taxed at a marginal rate of 35%.
Asset value = 1000
Debt value = 500
equity value = 500
What is Sangria's after-tax WACC?
Modern Advanced Accounting In Canada
ISBN: 9781259066481
7th Edition
Authors: Hilton Murray, Herauf Darrell