1.The BA720 Company has $15 million in pretax income, a tax rate of 30%, and a capital structure mix that is comprised of 78% in equity and 22% million in long term debt [market value basis]. The cost of debt is 9% and cost of equity is 12%. a) What is the companys weighted average cost of capital? b) What is the value of the company?

a) Companys weighted average cost of capital = (weight of equity * cost of equity) + (weight of debt * cost of debt) = (78% *12%) + (22%* 9%) = 9.36 + 1.98 = 11.34% Companys weighted average cost of capital (WACC) = 11.34%

b) Value of the company = post tax income / WACC = $ 15 million * (1-0.3)) / 0.1134 = $ 92.59 million The value of the company is $92.59 million

2. The AB300 Company is identical to the BA720 Company (information in previous problem) in every respect save two: it is debt free and its cost of equity is 11.5%.

a) What is the value of the AB300 Company? b) Explain the difference in values for AB300 versus BA320.

a) Pretax income = $15 million

Less: Tax @30% = $4.5 million

After tax income = $ 10.5 million

Value of company = $10.5 million/0.115= $91.30 million

The value of the AB300 Company is $91.30 million

b) Pretax income = $15 million

Less: Tax @30% = $4.5 million

After tax income = $10.5 million, WACC = 0.09*0.22 + 0.12*0.78 = 0.0198 + 0.0936 =11.34%

Value of company = $10.5 million/0.1134 = $92.59 million

Difference in value = BA720-AB300 =$92.59 million - $91.30 million = $1.29 million

The difference in values for AB300 versus BA320 is $1.29 million

3. Using the information from the two previous problems 1 &2, what is the Capital Structure mix on a dollar value basis for the BA707 and AB300 companies?

Please check answers for #1 and 2 and help calculation with #3. Thank you so much.