F G H I J K L M N A B D E Measuring the Weighted Average Cost of Capital. Calculate the weighted average cost of capital. Assume the company's securities are publicly traded, and its debt is currently trading at 100% of par value, and that its preferred stock is currently trading at 110% of its par value. The company's stock price is currently $8 per share, and the company has 5,000 shares of stock outstanding, which is net of 1,000 treasury shares. The risk-free rate is 4%, and the market risk premium is 6%. The company issued the debt and preferred stock at par value. The company has an equity beta equal to 1.5. The company has an effective interest rate equal to 7.5%, which includes an 0.5% default premium and the cost of capital for the prferred stock is equal to 7.5%. The income tax rate on all income is 30%. The company plans to have a constant capital structure strategy based on its current capital structure ratios. The company's income statement and balance sheets are given below. (18') 1 2 3 Balance Sheets and Income Statement 4 Year -1 Year 0 5 Revenue $ 12,000 6 Operating Expenses -6,000 7 Depreciation Expense -5,200 8 Earnings Before Interest and Taxes $ 800 9 Interest Expense -450 10 Income Before Taxes $ 350 11 Income Tax Expense -105 12 Net Income $ 245 13 14 Total Current Assets 2,000 $ 3,000 15 16 56 Property, Plant & Equipment (Net) 12,000 12,000 Total Assets $ 14,000 $ 15,000 17 18 Account Payable $ 1,000 $ 1,000 19 Debt 6,000 6,000 20 Total Liabilities $ 7,000 $ 7,000 22222 21 Preferred Stock $ 4,400 $ 4,600 Capital Stock 5,000 5,000 23 Retained Earnings -2,400 -1,600 24 Shareholders' Equity $ 7,000 $ 8,000 25 Liabilities and Shareholders' Equity $ 14,000 $ 15,000 0 P 0 R 25 25 26 A B Liabilities and Shareholders' Equity 27 28 First, find the capital structure ratios. 29 30 Share price 31 # Shares outsanding 32 # Treasure shares 33 34 Bond price Preferred price 35 36 Market Value of Equity 37 Market Value of Debt 38 Market Value of Preferred: 39 40 Market Value of Firm 41 42 Debt to Value 43 Preferred to Value 44 Equity to Value 45 46 47 C E F G H I J K L M N $ 14,000 $ 15,000 $ 8.00 5,000 1,000 100 110 0.0% 48 Then, estimate the weighted average cost of capital and unleverd cost of capital. 49 50 Risk-Free Rate 4.00% 51 Market Risk Premium 6.00% 52 Equity Beta 1.5 53 Yield on Debt 7.50% 54 Default premium 0.50% 55 Income Tax Rate 30.00% 56 57 Equity Cost of Capital 58 59 Cost of Debt 60 0 P 0 R A B C E F G H I J K L M N ST Market value of Ded 38 Market Value of Preferred: 39 40 Market Value of Firm 41 42 Debt to Value 43 Preferred to Value 44 Equity to Value 45 0.0% 46 47 48 Then, estimate the weighted average cost of capital and unleverd cost of capital. 49 50 Risk-Free Rate 51 Market Risk Premium 4.00% 6.00% 52 Equity Beta 1.5 53 Yield on Debt 7.50% 54 Default premium 0.50% 55 Income Tax Rate 30.00% 56 57 Equity Cost of Capital 58 59 Cost of Debt 60 61 Cost of Preferred 7.50% 62 63 Weighted Average Cost of Capital 64 65 Unlevered Cost of Capital 66 67 68 69 eet 70 71 72 0 P R