Question
David and Amelia's Toy Company Please explain in EXCEL (show formulas) where the HIGHLIGHTED % come from please. Formula Answer EQUITY INFO 1. After tax
David and Amelia's Toy Company
Please explain in EXCEL (show formulas) where the HIGHLIGHTED % come from please.
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| Formula | Answer |
| EQUITY INFO |
| 1. After tax cost of equity funding | D0*(1+G)/P | 14% |
| 50 million shares |
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| Issued with $40 Par value |
| 2. After tax cost of LT debt funding | I(1-t)+(RV-NP/n) | 6% |
| P=Sold at $40 per share, no excess |
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| /(RV+NP)/2 |
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| Market Price: $80 per share |
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| D0 = $5.15 |
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| 6.576666667 |
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| Growth Rate = 5.0% |
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| 104 |
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| Flotation Cost = 9.0% |
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| Retained Earnings = $1 billion |
| 3. The book value weights |
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| Common stock | 50000000 x $40/share | 2,000,000,000 |
| DEBT INFO |
| Retained earnings |
| 1,000,000,000 |
| $1 billion in outstanding debt |
| TOTAL EQUITY | 75% | 3,000,000,000 |
| $1,000 face value per bond |
| TOTAL DEBT | 25% | 1,000,000,000 |
| Current quote = 110 |
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| I= Coupon rate = 9%, semiannual coupons |
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| n= 15 years to maturity |
| 4. The marginal or market value weights |
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| Flotation Cost = 2% |
| Common stock | 50000000*72.8 | 3,640,000,000 |
| RV = $100 face value |
| Retained earnings |
| 1,000,000,000 |
| NP = net proceeds = 108 |
| TOTAL EQUITY | 81% | 4,640,000,000 |
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| TOTAL DEBT | 19% | 1,078,000,000 |
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| Marginal Tax Bracket |
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| t = tax rate 21% |
| 5. After tax WACC at book value |
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| Common stock | 75% | 13.50% |
| $80*9% float = 7.2 - $80 - 72.8 = price |
| Retained earnings | 25% | 6.30% |
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| WACC @ book |
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| 6. After tax WACC at market value |
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| Common stock | 81% | 13.50% |
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| Retained earnings | 19% | 6.30% |
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| WACC @ market |
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