Question
The balance sheet of Wisconsin Dairy Products, in millions of dollars, is shown below: Current assets $100 Current liabilities $50 Fixed assets 400 Long-term debt
The balance sheet of Wisconsin Dairy Products, in millions of dollars, is shown below:
Current assets $100 Current liabilities
$50 Fixed assets
400 Long-term debt
200 Deferred taxes
50 Common stock
100 Retained earnings
100 Total assets $500 TL & NW $500 In addition, the following information is provided:
(1) The debt consists of 20-year, 8%, semi-annual, $1,000 bonds, presently selling at $701.25. Floatation costs on new bonds would raise the effective before-tax interest cost to 0.5% above the yield to maturity on existing debt.
(2) The company has 10 million shares of common stock outstanding, with a market price of $30 a share. The stock has a beta of 1.5. The risk-free rate is 10% and the average market risk premium is 6.5%. Floatation costs would raise the effective cost of new equity by 1% over the cost of existing equity.
(3) Over the next year, which is the companys capital investment planning period, the company expects to have a net income of $30 million, half of which will be paid out as dividends.
(4) The company faces a tax rate of 35%.
Solve:
d. Determine the breakpoint using book value weights. e. Plot the marginal cost of capital schedule for Wisconsin Dairy Products using book value weights. Show all work. f. Determine the breakpoint(s) using market value weights. g. Plot the marginal cost of capital schedule for Wisconsin Dairy Products using market value weights. Show all work.
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