Question
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
- 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:
capital structure.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
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