The weighted average cost of capital (WACC) is calculated using the firm's target capital structure together...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The weighted average cost of capital (WACC) is calculated using the firm's target capital structure together with its after-tax cost of long-term debt, after-tax cost of short-term debt, cost of preferred stock, and cost of common equity. WACC = Weighted average cost of capital = Wara(1-T) + Wsta(1-T)rstd + Wps ps +Ws T's A firm's target capital structure consists of the following capital structure. Using the relevant costs calculated previously, what is the firm's weighted average cost of capital? T= 25% Wstd= 4% Estd Wd= 20% rd= Wps 2% T'ps= W = 74% r = Pre-tax cost of capital source, ri: After-tax cost of debt, (1-T)(r): Cost of capital component for WACC: Target capital structure weight, w: Weighted component cost: WACC = Sources of Capital Short- term Debt Long-term Preferred Common Debt Stock Stock 0% = Sum 0.00% = Sum Figure 9-1 MicroDrive, Inc.: Selected Capital Structure Data (Millions of Dollars, December 31, 2019) Investor-Supplied Capital Book Market Target Percent Book Percent Market Percent Liabilities and Equity of Total Value of Total Value of Total Capital Structure Accounts payable $ 200 5.5% Notes payable 150 4.2% $ 150 5.0% $ 150 5.7% Wstd= 4% Accruals 400 11.1% Total C.L. $ 750 20.8% Long-term debt 520 14.4% 520 17.3% 520 19.8% Wd= 20% Total liabilities $1,270 35.2% Preferred stock 100 2.8% 100 3.3% 100 3.8% Wps= 2% Common stock 500 13.9% Retained earnings 1,740 48.2% Total common equity Total $2,240 62.0% $2,240 $3,610 100.0% $3,010 74.4% 100.0% $1,860 $2,630 70.7% 100.0% W = 74% 100% Other Data (Millions, except per share data): Number of common shares outstanding = Price per share of common stock = Number of preferred shares outstanding = Price per share of preferred stock = Coupon rate on preferred stock = Flotation cost for issuing preferred stock = $100.00 7.00% 2.10% 60 Coupon rate on long-term debt = 10.00% $31.00 Par long term debt = $1,000 1 Market value long term debt = Interest rate on short-term debt = $1,200 6.00% Risk-free rate = 5.02% Beta = 1.33 Market risk premium= 6.00% Tax rate = 25% Notes: 1. The market value of the notes payable is equal to the book value. Existing long term bonds have a maturity of 15 years and 10% semi-annual coupon (par of $1,000) that is currently traded at $1,200. 2. The common stock price is $31 per share. There are 60 million shares outstanding, for a total market value of equity of $31(60) = $1,860 million. 3. The preferred stock price is $100 per share. There are 1 million shares outstanding, for a total market value of preferred of $100(1) = $100 million. The weighted average cost of capital (WACC) is calculated using the firm's target capital structure together with its after-tax cost of long-term debt, after-tax cost of short-term debt, cost of preferred stock, and cost of common equity. WACC = Weighted average cost of capital = Wara(1-T) + Wsta(1-T)rstd + Wps ps +Ws T's A firm's target capital structure consists of the following capital structure. Using the relevant costs calculated previously, what is the firm's weighted average cost of capital? T= 25% Wstd= 4% Estd Wd= 20% rd= Wps 2% T'ps= W = 74% r = Pre-tax cost of capital source, ri: After-tax cost of debt, (1-T)(r): Cost of capital component for WACC: Target capital structure weight, w: Weighted component cost: WACC = Sources of Capital Short- term Debt Long-term Preferred Common Debt Stock Stock 0% = Sum 0.00% = Sum Figure 9-1 MicroDrive, Inc.: Selected Capital Structure Data (Millions of Dollars, December 31, 2019) Investor-Supplied Capital Book Market Target Percent Book Percent Market Percent Liabilities and Equity of Total Value of Total Value of Total Capital Structure Accounts payable $ 200 5.5% Notes payable 150 4.2% $ 150 5.0% $ 150 5.7% Wstd= 4% Accruals 400 11.1% Total C.L. $ 750 20.8% Long-term debt 520 14.4% 520 17.3% 520 19.8% Wd= 20% Total liabilities $1,270 35.2% Preferred stock 100 2.8% 100 3.3% 100 3.8% Wps= 2% Common stock 500 13.9% Retained earnings 1,740 48.2% Total common equity Total $2,240 62.0% $2,240 $3,610 100.0% $3,010 74.4% 100.0% $1,860 $2,630 70.7% 100.0% W = 74% 100% Other Data (Millions, except per share data): Number of common shares outstanding = Price per share of common stock = Number of preferred shares outstanding = Price per share of preferred stock = Coupon rate on preferred stock = Flotation cost for issuing preferred stock = $100.00 7.00% 2.10% 60 Coupon rate on long-term debt = 10.00% $31.00 Par long term debt = $1,000 1 Market value long term debt = Interest rate on short-term debt = $1,200 6.00% Risk-free rate = 5.02% Beta = 1.33 Market risk premium= 6.00% Tax rate = 25% Notes: 1. The market value of the notes payable is equal to the book value. Existing long term bonds have a maturity of 15 years and 10% semi-annual coupon (par of $1,000) that is currently traded at $1,200. 2. The common stock price is $31 per share. There are 60 million shares outstanding, for a total market value of equity of $31(60) = $1,860 million. 3. The preferred stock price is $100 per share. There are 1 million shares outstanding, for a total market value of preferred of $100(1) = $100 million.
Expert Answer:
Related Book For
Posted Date:
Students also viewed these finance questions
-
6. Use the following information to complete Schedule M-1 (Form 1120) for ADZ Corporation. ADZ net income per books $350,485 Federal income taxes 98,389 Excess of capital losses over capital gains...
-
Consider COGS.xlsx. Apply the following forecasting methods to forecast two years: Implement each model in a separate spreadsheet. Plot the data. How would you describe the data in terms of...
-
Suppose Marriott evaluates a project that requires participation of all three divisions. What is the appropriate hurdle rate? This is based off of this case study: Marriott Corporation: The Cost of...
-
b) A firm produces two types of sugar, A and B at a constant average cost of RM 2 and RM3 per kilogram, respectively. The quantities, q and qg (in kilogram) of A and B that can be sold each week are...
-
An educational researcher was interested in the effect of academic performance in high school on academic performance in college. She consulted the school records of 12 college graduates, all of whom...
-
Some of the most powerful lasers in the world are used in nuclear fusion experiments. The NOVA laser produced 40.0 kJ of energy in a pulse that lasted 2.50 ns, and the NIF laser produces a 20.0-ns...
-
In March, Santana Company completes Jobs 10 and 11. Job 10 cost \($20,000\) and Job 11 \($32,000\). On March 31, Job 10 is sold to the customer for \($35,000\) in cash. Jour- nalize the entries for...
-
Prepare the statement of retained earnings for Damon Design Studio for the year ending December 31, 2018. The assets, liabilities, and equities of Damon Design Studio have the following balances at...
-
2 points DataSpan, Inc., automated its plant at the start of the current year and installed a flexible manufacturing system. The company is also evaluating its suppliers and moving toward Lean...
-
The Stilton Company has the following inventory and credit purchases during the fiscal year ended December 31, 2020. Beginning Feb. 10 528 units e $89/unit 270 units e $86/unit 150 units @ $99/unit...
-
Rosa joined Avion Electronics in April 1983. Her employment was terminated on November 30, 2016 and she was paid a $63,500.00 retiring allowance. Rosa joined her company's pension plan in 1984 and...
-
16.Fifteen people work in an office. 9 are women and 6 are men.The flu virus is coming. (a)In how many ways can the flu virus randomly select 7 workers out of the 15 to get sick?Show work. (b)In how...
-
What could be an excellent Budget Narrative / Budget Justification for the following project? Please, use the attached template to itemize the project expenses and miscellaneous. Project title:...
-
Suppose Karl has $9197 and want to invest these funds to make a portfolio with a beta of 0.42 by investing in the market portfolio and by borrowing/lending at the risk-free rate. What would his...
-
You are assessing the average performance of two mutual fund managers with the Fama-French 3-factor model. The fund managers and the Fama-French factors had the following performance over this period...
-
The yield-to-maturity (APR, semi-annually compounded) on a coupon bond with semi-annual coupon payments and a maturity of 12.5 years is 6%. The bonds have a face value of $1,000 and pay semi-annual...
-
The Fast N' Hot food chain wants to test if their "Buy One, Get One Free" program increases customer traffic enough to support the cost of the program. For each of 15 stores, one day is selected at...
-
What types of questions can be answered by analyzing financial statements?
-
Given the probabilities of expected states of the economy shown here, and the expected returns to stocks A and B in those states, what is the standard deviation of a portfolio with weights of 40...
-
The controller of Getty Industries has collected the following monthly expense data for use in analysis the cost behavior of maintenance costs. Instructions (a) Determine the fixed and variable cost...
-
Stock W has an expected return of 12.4 percent and a beta of 1.8. If the expected market return is 10 percent, what is the risk-free rate? a. -5.6% b. 3.0% c. 5.6% d. 7.0%
Study smarter with the SolutionInn App