Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield

15th edition

978-1118159644, 9781118562185, 1118159640, 1118147294, 978-1118147290

More Books

Students also viewed these Accounting questions

Question

Describe and apply vertical analysis. AppendixLO1

Answered: 1 week ago

Question

Make efficient use of your practice time?

Answered: 1 week ago