Suppose you are contracted by a firm to calculate their weighted average cost of capital (WACC) and provide some suggestions based on your findings The firm has provided you with a copy of their balance sheet, as shown in the table below Balance Sheet for WACC Analysis ASSETS LIABILITIES Current Assets $10,000,000 Long term Debt $50,000,000 Fixed Assets (Net) $85,000,000 EQUITY Intangibles $25,000,000 Common Stock $100,000 Addl Paid in Capital $44,900,000 Retained Earnings $25,000,000 Total Assets $120,000,000 Total Liab Equity $120,000,000 Notes Long term debt consists of 50,000 bonds issued at par Each bond has a face amount of $1,000, a stated rate of 8 , and a 20 year term Coupon (interest) payments are made annually Equity consists of 100,000 shares of common stock with a par value of $1 00 What is the cost of debt, r d (or YTM), if the firms bonds are currently selling for $875 and have 12 years left to maturity What is the current value of the firms long term debt What is the cost of equity, r e , if the firms Beta is 1 20 Assume that the risk free rate of return, r RF , is 4 and the risk premium of the market, RPM, is 12 What is the current value of the firms equity if the price of the firms common stock is $505 25 What is the firms current capital structure In other words, what are W d and W e What is the firms weighted average cost of capital (WACC) assuming the firms tax rate is 40 Suppose this firm wants to purchase a new facility and is trying to decide between debt financing (i e , issuing bonds) or equity financing (i e , selling shares of stock) If the target capital structure in this industry is 40 debt 60 equity, what should the firm do and why Suppose the firm can issue an additional $20,000,000 of debt at the yield to maturity (YTM) you found in (1 ) How would this change the firms WACC Suppose the firms stock price falls to $482 75 How would this change the firms WACC Assume the firms Beta is unchanged Suppose the firms stock price rises to $527 75 How would this change the firms WACC Assume the firms Beta is unchanged

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Suppose you are contracted by a firm to calculate their weighted average cost of capital (WACC) and provide some suggestions based on your findings. The

Suppose you are contracted by a firm to calculate their weighted average cost of capital (WACC) and provide some suggestions based on your findings. The firm has provided you with a copy of their balance sheet, as shown in the table below.

Balance Sheet for WACC Analysis
ASSETS:	LIABILITIES:
Current Assets	$10,000,000	Long-term Debt	$50,000,000
Fixed Assets (Net)	$85,000,000	EQUITY:
Intangibles	$25,000,000	Common Stock	$100,000
		Addl. Paid in Capital	$44,900,000
		Retained Earnings	$25,000,000
Total Assets:	$120,000,000	Total Liab. & Equity	$120,000,000
Notes: Long-term debt consists of 50,000 bonds issued at par. Each bond has a face amount of $1,000, a stated rate of 8%, and a 20-year term. Coupon (interest) payments are made annually. Equity consists of 100,000 shares of common stock with a par value of $1.00.

1. What is the cost of debt, r_d (or YTM), if the firms bonds are currently selling for $875 and have 12 years left to maturity?
2. What is the current value of the firms long-term debt?
3. What is the cost of equity, r_e, if the firms Beta is 1.20? Assume that the risk-free rate of return, r_RF, is 4% and the risk premium of the market, RPM, is 12%.
4. What is the current value of the firms equity if the price of the firms common stock is $505.25?
5. What is the firms current capital structure? In other words, what are W_d and W_e?
6. What is the firms weighted average cost of capital (WACC) assuming the firms tax rate is 40%?
7. Suppose this firm wants to purchase a new facility and is trying to decide between debt financing (i.e., issuing bonds) or equity financing (i.e., selling shares of stock). If the target capital structure in this industry is 40% debt/60% equity, what should the firm do and why?
8. Suppose the firm can issue an additional $20,000,000 of debt at the yield to maturity (YTM) you found in (1.). How would this change the firms WACC?
9. Suppose the firms stock price falls to $482.75. How would this change the firms WACC? Assume the firms Beta is unchanged.
10. Suppose the firms stock price rises to $527.75. How would this change the firms WACC? Assume the firms Beta is unchanged.