Problem 19-8 WACC The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in thousands) is as follows: Short-term debt Accounts payable Current liabilities 75,800 62,200 138,000 Cash and marketable securities Accounts receivable Inventory Current assets Property, plant, and equipment Deferred taxes Other assets Total 1,700 120, 200 125, 200 247, 100 212,200 45,200 88, 800 593,300 Long-term debt 208,800 Shareholders' equity Total 246,500 593,300 The debt has an interest rate of 5.50% (short term) and 7.50% (long term). The expected rate of return on the company's shares is 14.50%. There are 7.48 million shares outstanding, and the shares are trading at 48. The tax rate is 25%. Assume the company issues 50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure. sa a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer percent rounded to 2 decimal places.) Answer is complete but not entirely correct. Cost of equity 48.59 X % b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Answer is complete but not entirely correct. Weighed-average cost of capital 10.39 % Problem 19-8 WACC The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in thousands) is as follows: Short-term debt Accounts payable Current liabilities 75,800 62,200 138,000 Cash and marketable securities Accounts receivable Inventory Current assets Property, plant, and equipment Deferred taxes Other assets Total 1,700 120, 200 125, 200 247, 100 212,200 45,200 88, 800 593,300 Long-term debt 208,800 Shareholders' equity Total 246,500 593,300 The debt has an interest rate of 5.50% (short term) and 7.50% (long term). The expected rate of return on the company's shares is 14.50%. There are 7.48 million shares outstanding, and the shares are trading at 48. The tax rate is 25%. Assume the company issues 50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure. sa a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer percent rounded to 2 decimal places.) Answer is complete but not entirely correct. Cost of equity 48.59 X % b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Answer is complete but not entirely correct. Weighed-average cost of capital 10.39 %
