here's the template, please use it and show the work
The following are the summary audited current year financial statements for JMJ, Inc. Income Statement (USD 000s) Balance Sheet (USD 000s) Working capital Net fixed assets Total assets 200 1,800 2.000 Revenue Operating expense Depreciation EBIT Interest NIBT Tax @ 26.5% NIAT 1,000 400 200 400 60 340 90 250 Long-term debt Preferred stock Common equity Total capital 800 100 1,100 2,000 Market value information: Long-term debt consists of 800 7.5% coupon bonds, $1,000 par value, 10 years to maturity. The bonds are trading at a price of $1,100. Preferred stock consists of 1,000 stock is trading at $80 per share. $100 par value shares paying a 5% annual dividend. The Common stock consists of 25,000 $2 par value shares. The common shares are trading at $90 per share. The current year's common dividend was $5 per share. Common dividends will grow at a rate of 6% per year indefinitely. The company's beta is 2.0 Additional information: The average 5-year yield on US Government obligations is 3%. The market risk premium is 4%. As stated above, JMJ Inc.'s beta is 2.0 and, as noted on the income statement, its income tax rate is 26.5%. Required: Compute the firm's weighted average cost of capital on a market value basis, using the template that we used in class. (See Solution to Chapter 14, Problem no. 15 for the template.) Problem 15 Market Value Percentage of Required Rate Total Capital of Return minus the Tax Rate Component Weight 0.65 Bonds Preferred stock Common stock 8.480.000 1,080,000 17,670,000 27,230,000 31.14% 3.97% 64.89% 100.00% 6.08% 5.55% 12.11% 0.01231 0.00220 0.07858 0.09309 WACC Facts: Market Value Coupon/ Dividend Dividend Growth Rate Number Par Value Beta Bonds* 8.000 $1,060 $1,000 6.50% Preferred stock 15,000 $72 $100 4.00% Comm. stock** 310.000 $57 $4.00 5.00% 1.05 * Bond remaining maturity is 25 years. Tax rate is 35%. ** Risk free rate is 4.5% MRP is 7% Cost of Debt: Cost of Common Equity YTM = Coupon + [IF P//t]/[(F + P)/2] Dividend Growth Model: YTM = 65 + [(1,000 1,060/25)]/[(1,000 + 1,060)/2] YTM = 65 2.40/1,030 Po = Do (1+g)/Re - YTM = 62.60/1,030 57 = 4 (1.05)/(Re .05) YTM = 6.08% 57Re 2.85 = 4.20 57Re = 7.05 Cost of Preferred Stock: Re = 7.05/57 Re = 12.37% Po = Do Rp 72 = 4/Rp Capital Asset Pricing Model 72Rp = 4 Rp = 4/72 Re = Rf + beta (Rm Rf) Rp = 5.55% Re = .045 + 1.05 (107) Re = 045 + 0735 Re = 11.85% 0.1237 0.1185 0.2422 2 0.1211 The following are the summary audited current year financial statements for JMJ, Inc. Income Statement (USD 000s) Balance Sheet (USD 000s) Working capital Net fixed assets Total assets 200 1,800 2.000 Revenue Operating expense Depreciation EBIT Interest NIBT Tax @ 26.5% NIAT 1,000 400 200 400 60 340 90 250 Long-term debt Preferred stock Common equity Total capital 800 100 1,100 2,000 Market value information: Long-term debt consists of 800 7.5% coupon bonds, $1,000 par value, 10 years to maturity. The bonds are trading at a price of $1,100. Preferred stock consists of 1,000 stock is trading at $80 per share. $100 par value shares paying a 5% annual dividend. The Common stock consists of 25,000 $2 par value shares. The common shares are trading at $90 per share. The current year's common dividend was $5 per share. Common dividends will grow at a rate of 6% per year indefinitely. The company's beta is 2.0 Additional information: The average 5-year yield on US Government obligations is 3%. The market risk premium is 4%. As stated above, JMJ Inc.'s beta is 2.0 and, as noted on the income statement, its income tax rate is 26.5%. Required: Compute the firm's weighted average cost of capital on a market value basis, using the template that we used in class. (See Solution to Chapter 14, Problem no. 15 for the template.) Problem 15 Market Value Percentage of Required Rate Total Capital of Return minus the Tax Rate Component Weight 0.65 Bonds Preferred stock Common stock 8.480.000 1,080,000 17,670,000 27,230,000 31.14% 3.97% 64.89% 100.00% 6.08% 5.55% 12.11% 0.01231 0.00220 0.07858 0.09309 WACC Facts: Market Value Coupon/ Dividend Dividend Growth Rate Number Par Value Beta Bonds* 8.000 $1,060 $1,000 6.50% Preferred stock 15,000 $72 $100 4.00% Comm. stock** 310.000 $57 $4.00 5.00% 1.05 * Bond remaining maturity is 25 years. Tax rate is 35%. ** Risk free rate is 4.5% MRP is 7% Cost of Debt: Cost of Common Equity YTM = Coupon + [IF P//t]/[(F + P)/2] Dividend Growth Model: YTM = 65 + [(1,000 1,060/25)]/[(1,000 + 1,060)/2] YTM = 65 2.40/1,030 Po = Do (1+g)/Re - YTM = 62.60/1,030 57 = 4 (1.05)/(Re .05) YTM = 6.08% 57Re 2.85 = 4.20 57Re = 7.05 Cost of Preferred Stock: Re = 7.05/57 Re = 12.37% Po = Do Rp 72 = 4/Rp Capital Asset Pricing Model 72Rp = 4 Rp = 4/72 Re = Rf + beta (Rm Rf) Rp = 5.55% Re = .045 + 1.05 (107) Re = 045 + 0735 Re = 11.85% 0.1237 0.1185 0.2422 2 0.1211
