Exhibit IV: SCRPC's Balance Sheet Information (5000s) BOOK Accounts Payable Accruals and Other Current Liabilities Notes Payable (for working capital) $120.124 64.111 58.125 TOTAL CURRENT LIABILITIES Long-term Debt TOTAL LIABILITIES Preferred Stock (par $100) 242,360 275,000 517,360 5,000 Common Equity ($1 par) 10,000 Excess of Par 40,000 Retained Earnings 458,445 TOTAL LIABILITIES AND EQUITY $1,030,805 Exhibit V: Market, Industry, and SCRPC's Financial Information Treasury Bill Rate 4.25% Long-term Government Bond Yield 7.45% Long-term Corporate Bond Yield 8.75% Average Beta for Industry 1.25 SCRPC'S Beta 1.45 Average P/E Ratio for Industry 13.50 SCRPC'S Recent P/E Ratio 10.75 Recent Price of SCRPC's Common Stock $36.01 SCRPC's Tax Rate 40% SCRPC's Bond Risk Premium 4.0% SCRPC's Bond's are selling at $910 with a Coupon. Rate of 7.25 and maturity of 14 years. Floatation costs for the bonds would be $5 per bond. SCRPC's preferred stock ($100 par) pays a $14 dividend and is selling for $110. The firm would have a $5 floatation cost if it sold preferred stock today. If SCRPC sold additional common stock, the floatation cost and the decline in value would be about 20% of the current price. Component Exhibit VI: Find the WACC (using Retained Earnings) After Tax Cost Market Value (000's) Weight Contribution Notes Payable Bonds Preferred Stock Common Stock TOTAL How do I calculate SCRPC's cost of capital when retained earnings is the source of common stock financing and the Gordon Model estimate (8.25%) is used? Use current market values of the financial instruments to determine the components weights (see Exhibit VI). |