9-17. WACC Estimation Your boss has asked you to estimate your company's WACC. You have assembled the following information: Balance Sheet as at December 31, 2015 (5000s) Current assets $10,000 Net fixed assets 65,000 Current liabilities Long-term bonds Total liabilities Equity Total liabilities and equity $14,000 26,000 40,000 35,000 $75,000 Total assets $75,000 Additional company information: Beta 0.9 Current stock price $21 Most recent dividend $1.50 Bonds issued 5 years ago: $26 million par value, 20-year, 9% semi-annual interest, currently priced at 103; flotation costs are 2% Shares outstanding 6 million EPS and DPS past 5-year annual growth rate 10% Common share flotation costs 6% Target capital structure 60% equity/40% debt Tax rate 30% ROE, average past 5 years Dividend payout ratio 30% Current liabilities consist of short-term par value bank debt at 3% to finance seasonal assets. This debt is paid off in the off-season. 18% Your company has been experiencing very rapid earnings and dividend growth, though the market for your products has matured, and going forward you expect growth to be tied to the overall economy's growth. You also realize that the market and your company's stock have risen dramatically recently, and you seriously question whether the stock price is sustainable. Any new equity needed comes from internal sources. Market information: Current 90-day T-bill rate Historical 90-day T-bill rate Historical average 10-year risk-free bond rate Current 10-year risk-free bond rate Expected market return Expected long-term annual GDP growth rate 2.25% 3.9% 7.75% 5.0% 11.0% 2% a. Determine whether the weighting for each component cost of capital should be based on the existing market values or the target weighting. Explain your answer. Answer b. Calculate the WACC. Note: there is some subjective analysis to make in answering this