Question
Problem 2 a. The following balance sheet and information are given for Pavone Company (VC): Current Assets $2,000,000 Current Liabilities $1,000,000 Short-term Securities 0 Long-term
Problem 2
a. The following balance sheet and information are given for Pavone Company (VC):
| Current Assets | $2,000,000 | Current Liabilities | $1,000,000 |
| Short-term Securities | 0 | Long-term Liabilities(Bonds) | $5,000,000 |
| Long-term Assets | 7,000.000 | Equity | $3,000,000 |
| Total | $9,000,000 | Total | $9,000,000 |
Additional information: The VC's bond has a face value of $1,000 and pays 10 percent semiannual coupon. The bond matures in 12 years and sells for $920 in the bond market. The beta of VC is 1.25, the market risk premium is 7.95 percent, and the risk-free rate is 2.50 percent. The VC's tax rate is 40%.
What is Pavone's WACC?
b. The following information is given for Guida Company (GC):
- Bond outstanding: 3,000 bonds, selling at $995 per bond.
- Common stock outstanding: 260,000 shares, selling at $23.40 per share.
- The before-tax cost of debt of the company is 12.31%, the beta of Guida is 1.40, the market risk premium is 7.95%, the tax rate is 40%, and the risk-free rate is 2.50%? What is Guida's WACC?
Required: Calculate WACC for both companies. Please describe, in writing, how do you calculate WACCs in 5 lines?
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Fundamentals Of Financial Management
Authors: James Van Horne, John Wachowicz
13th Revised Edition
978-0273713630, 273713639
