Question

Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.8. There are 1 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firm's tax rate is 21%. Assets Cash and short-term securities $ 2.0 Accounts receivable 5.0 Inventories 9.0 Plant and equipment 21.0 BOOK-VALUE BALANCE SHEET (Figures in $ millions) Liabilities and Net Worth Bonds, coupon = 6%, paid annually (maturity - 10 years, current yield to maturity = 7%) Preferred stock (par value $10 per share) Common stock (par value $0.40) Additional paid-in stockholders' equity Retained earnings Total $10.0 3.0 0.4 14.6 9.0 $37.0 Total $37.0 a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? (For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Market debt-to-value ratio WACC

Answer 1

Parta: financing Bond (working 1) preferred stock =(3000000* 15/10) equity (1000000*20) total market value Market value 9,297,641.85 4,500,000.00 20,000,000.00 33,797,641.85 27.51% market debt to value ratio=Debt/Value 9297641.85/33797641.85 b.calculation of WACC Financing after tax cost Bond preferred stock e quity 5.53% 20.00% 17.60% market value weight WACC b c=b/total d=a*c 9,297,641.85 27.50974% 1.52% 4,500,000.00 13.31454% 2.66% 20,000,000.00 59.17573% 10.41% 33,797,641.85 WACC 14.60% Total

working 1: face value annual coupon = Current yield to maturity Number of payments = 10000000 6.0% 7.0% 10 PV of bond = PV of interest + PV of maturity PV of interest annual interest (10000000*6%) x PVIFA( 7%, 10)** PV of interest 600,000.00 7.02358 4,214,148.92 PV of maturity value Par value X PVIF(7%,10) *** PV of maturity value 10,000,000.00 0.50835 5,083,492.92 PV of bond/Price of bond 9,297,641.85 7.02358 ** PVIFA(7%, 10) formula (1-(1.074-10))/0.07 (1-(1+r)^-n)/r 1/(1.07410) 0.50835 ***PVIF( 7%,10) formula = 1/(1+r)^n working 2: after tax cost of Debt = 7%*(1-0.21) 5.53% cost of preferred stock (rp)=Dividend/market price=3/15 20.00% 17.60% cost of equity (re) = risk free rate+beta *market risk premium 0.08+0.8*0.12