Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Determine the weighted average cost of capital (WACC) for each of the Table 1 Pacific Technology COMPANY Balance Sheet 12/31/2005 Assets Liability & Equity

  1. Determine the weighted average cost of capital (WACC) for each of the

    Table 1                                 Pacific Technology COMPANY

    Balance Sheet 12/31/2005

    Assets

    Liability & Equity

    Cash

    $6,000,000

    Account Payable

    $1,000,000

    Account Receivable

    $8,000,000

    Notes Payable

    $3,000,000

    Inventory

    $3,000,000

    Accrued Taxes

    $1,000,000

    Current Asset

    $17,000,000

    Current Liabilities

    $5,000,000

    GFA

    $40,000,000

    Long-term debt

    $10,000,000

    Accumulated Depreciation

    ($2,000,000)

    Preferred Stock (0.5 million shares)

    $15,000,000

    Net Fixed Assets

    $38,000,000

    Common Stock (1 million shares)

    $10,000,000

    Returned Earnings

    $15,000,000

    Common Equity

    $25,000,000

    Total Asst

    $55,000,000

    Total Liability & Equity

    $55,000,000

    Table 2 -Income Statement (12/31/2005)

    Sales

    $25,000,000

    Cost of Sales

    -8,500,000

    Earnings Before Depreciation and Amortization (EBITDA)

    $16,500,000

    Depreciation

    -1,550,000

    Earnings Before Interest and taxes (EBIT)

    $14,950,000

    Interest Expense

    ($950,000)

    Taxable Income

    $14,000,000

    Taxes (40%)

    ($5,600,000)

    Net Income

    $8,400,000

               

    Its established common stock’s dividend payout ratio after the preferred stock dividends payment is 50 percent and it is expected to grow at a constant rate of 9 percent in the future. The tax rate is 40 percent and investors requiring a rate of return of 15% on the common stock.

    Preferred stock is trading at a price of $40 per share, with a dividend of $4.8. The 30-year long-term debt with a par value of $1,000 was issued 10 years ago with a coupon rate of 8%. The bonds can be refinanced at the market interest rate of 10 percent today.

    Pacific Technology has the following investment opportunities:

    Table 3

    Project

    Annual Net

    Project

    Cost

    Cash Flow

    Life

    Defense 1

    $1,000,000

    $219,120

    7

    Defense 2

    $2,000,000

    368,580

    10

    Eng. Materials 1

    $1,000,000

    222,851

    8

    Eng. Materials 2

    $2,000,000

    542,784

    6

    Communication and Space 1

    $1,000,000

    202168

    9

    Communication and Space 2

    $1,000,000

    319,775

    5

    capital structure.

Step by Step Solution

3.52 Rating (159 Votes )

There are 3 Steps involved in it

Step: 1

Calculating WACC Cost of debt Kd 8 given as 8 coupon rate Cost o... 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

Cost Management Measuring Monitoring And Motivating Performance

Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook

2nd Canadian Edition

1118168879, 9781118168875

More Books

Students also viewed these Finance questions

Question

What are the pros and cons of using credit? (p. 321)

Answered: 1 week ago