Question

Williams, Inc., has compiled the following Information on its financing costs: 0.5 points Type of Financing Book Value Market Value Cost Short-term debt $14,800.000 $ 13.900,000 4.1% Long-term debt 41,000,000 35,600,000 7.2 Common stock 11,800.000 96.000.000 13.0 Total $67,600,000 $145.500,000 eBook . Print The company is in the 24 percent tax bracket and has a target debt-equity ratio of 65 percent. The target short-term debt/long-term debt ratlo ls 15 percent. References a. What is the company's welghted average cost of capital using book value weights? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) b. What is the company's weighted average cost of capital using market value weights? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places. e.... 32.16.) c. What is the company's welghted average cost of capital using target capital structure welghts? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) a. Weighted average cost of capital b. Weighted average cost of capital c. Weighted average cost of capital

Answer 1

a. Weight of Short term debt Book value =14800000/67600000
Weight of Long term debt Book value =41000000/67600000
Weight of Common Stock Book value =11800000/67600000
WACC =Weight of Short Term debt*Cost of Debt*(1-Tax rate)+ Weight of Long Term Debt*(1-Tax rate)*Cost of Long term debt +Weight of Equity*Cost of Equity
=14800000/67600000*4.1%*(1-24%)+41000000/67600000*7.2%*(1-24%)+11800000/67600000*13%=6.27%

b.Weight of Short term debt market value =13900000/145500000=
Weight of Long term debt market value =35600000/145500000
Weight of Common Stock market value =96000000/145500000
WACC =Weight of Short Term debt*Cost of Debt*(1-Tax rate)+ Weight of Long Term Debt*(1-Tax rate)*Cost of Long term debt +Weight of Equity*Cost of Equity
=13900000/145500000*4.1%*(1-24%)+35600000/145500000*7.2%*(1-24%)+96000000/145500000*13%=10.21%

c. Target
Weight of Common Stock target weight =65%
Total Debt =35%
Let x be the long tern debt
Then short term debt =15%*x
15%X+X=35%
X=35%/1.15
Short term debt =0.15*35%/1.15
WACC =Weight of Short Term debt*Cost of Debt*(1-Tax rate)+ Weight of Long Term Debt*(1-Tax rate)*Cost of Long term debt +Weight of Equity*Cost of Equity
=0.15*35%/1.15*4.1%*(1-24%)+35%/1.15*7.2%*(1-24%)+65%*13%=10.26%