Question
Here is the condensed 2015 balance sheet for Amrita Cosmetic Company (in thousands of dollars): Condensed Balance Sheet for Amrita Cosmetic Company FY2015 Current assets
Here is the condensed 2015 balance sheet for Amrita Cosmetic Company (in thousands of dollars): | |||||
Condensed Balance Sheet for Amrita Cosmetic Company |
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FY2015 |
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Current assets | $2,000 |
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Net fixed assets | 3,000 |
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Total assets | $5,000 |
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Total debt | $2,100 |
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Preferred stock | 250 |
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Common stock | 1,300 |
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Retained earnings | 1,350 |
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Total common equity | $2,650 |
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Total liabilities & equity | $5,000 |
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The firm's marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at $1,051.11. The debt matures in 7 years. Coupon interest is paid semiannually. A flotation cost of $2 per share would be required.
Amrita Cosmetic's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share.
Amrita Cosmetic's earnings per share last year were $3.20. The common stock sells for $55.00, last years dividend (D0) was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%.
The market risk premium is 5%, the risk-free rate is 6%, and Amrita Cosmetic's beta is 1.52.
Calculate the after-tax cost of debt (i.e., (1-tax rate)*kd )
Calculate the cost of equity from retained earnings (ke )AND the cost of newly issued common stock (ks ). Use the DCF method to find the cost of common equity.
Now calculate the cost of common equity from retained earnings using the CAPM method (ke ).
Calculate the cost of preferred stock (kp )
weight of debt: Wd |
weight of preferred stock: Wp |
weight of total common equity: We |
Calculate the weights of capital components based on the book value balance sheet.
6) Assume that Skye uses the book value of each capital compoent for the weights of capital components.
What is the firm's WACC assuming thatit uses only retained earnings for equity?Simply find appropirate values you obtained from the questions aboveand plug them into the cells in gray using function wizard, fx.
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| a) Weights of Each Capital Component (i.e., answers to 5)) | b) Cost of Each Capital Component (i.e., anwer to 1),2),3), and 4)) | (a)*(b) | ||
Debt |
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Preferred Stock |
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Common Equity |
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7) Assume that Skye uses the book value of each capital compoent for the weights of capital components.
What is the firm's WACC assuming that if it expands so rapidly that it must issue new common stock? ?
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