0. CASE 1 (25 points)

   Look at the below book-value balance sheet for Universal Corporation. The preferred stock currently sells for 15 per share and pays a dividend of 2 a share. The common stock currently sells for 20 per share and has a beta of 0.8. The bonds currently sell at 935.82. The market risk premium is 10%, the risk-free rate is 6%, and the firms tax rate is 40%.

Instructions:

1. Calculate the firms outstanding number of bonds, preferred shares and common shares.

2. Calculate the firms market value capital structure. 3. Calculate the firms costs of common equity, preferred stock and debt. 4. Calculate the weighted average cost of capital.

5. If the firm is considering an average risk project with an internal rate of return of 14%, should it accept the project? Explain.

BOOK-VALUE BALANCE SHEET (Figures in millions)

Assets Liabilities and Equity

Cash and short-term securities 1 Accounts receivable 3 Inventories 7 Plant and equipment 21

Total 32

Bonds (par value 1000; coupon 8% paid annually; maturity 10 years; yield to maturity 9%) 10 Preferred stock (par value 20) 2 Common stock (par value 0.10) 0.1 Additional paid-in stockholders equity 9.9 Retained earnings 10

32