Question
Assume that you have been hired as a consultant by ABC Co., a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups,
Assume that you have been hired as a consultant by ABC Co., a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
Assets | |
Current assets | 38,000,000 |
Net plant, property, and equipment | 101,000,000 |
Total assets | 139,000,000 |
Liabilities and Equity | |
Accounts payable | 10,000,000 |
Accruals | 9,000,000 |
Current liabilities | 19,000,000 |
Long-term debt (40,000 bonds, $1,000 par value) | 40,000,000 |
Total liabilities | 59,000,000 |
Common stock (10,000,000 shares) | 30,000,000 |
Retained earnings | 50,000,000 |
Total shareholders' equity | 80,000,000 |
Total liabilities and shareholders' equity | 139,000,000
|
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market (i.e., Rm)is 11.50%. The firm's tax rate is 40%.
1) What is the best estimate of the after-tax cost of debt (%)? i.e, (1-t)*kd?
2) Based on the CAPM, what is the firm's cost of equity (%) ? i.e., ke?
3) Calculate the weights of market value of debt and market value of equity for use in calculating the WACC based in market values? i.e., Wd (%) and We (%)
4) Calculate ABC's WACC (%) based on your answers to 1), 2), and 3)
Show all of your calculations with appropriate explanation.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started