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Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3
Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.7. There are 2 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firms tax rate is 21%.
BOOK-VALUE BALANCE SHEET | ||||||||
(Figures in $ millions) | ||||||||
Assets | Liabilities and Net Worth | |||||||
Cash and short-term securities | $ | 2.0 | Bonds, coupon = 5%, paid annually (maturity = 10 years, current yield to maturity = 7%) | $ | 10.0 | |||
Accounts receivable | 3.0 | Preferred stock (par value $20 per share) | 3.0 | |||||
Inventories | 7.0 | Common stock (par value $0.10) | 0.2 | |||||
Plant and equipment | 25.0 | Additional paid-in stockholders equity | 11.8 | |||||
Retained earnings | 12.0 | |||||||
Total | $ | 37.0 | Total | $ | 37.0 | |||
a. What is the market debt-to-value ratio of the firm?
b. What is Universitys WACC?
Problem 13-7 WACC (LO1) Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.7. There are 2 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firm's tax rate is 21%. Assets Cash and short-term securities Accounts receivable Inventories Plant and equipment $ 2.0 3.0 7.0 25.0 BOOK-VALUE BALANCE SHEET (Figures in $ millions) Liabilities and Net Worth Bonds, coupon = 5%, paid annually (maturity = 10 years, current yield to maturity = 7%) Preferred stock (par value $20 per share) Common stock (par value $0.10) Additional paid-in stockholders' equity Retained earnings Total MO 11.8 12. $37.0 Total $37.0 a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? (For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)Step by Step Solution
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