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 0.7. There are 1 million common shares outstanding. The market risk premium is 11%, the risk-free rate is 7%, and the firm’s tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 1.0 Bonds, coupon = 8%, paid annually (maturity = 10 years, current yield to maturity = 9%) $ 5.0 Accounts receivable 4.0 Preferred stock (par value $20 per share) 3.0 Inventories 8.0 Common stock (par value $0.20) 0.2 Plant and equipment 20.0 Additional paid-in stockholders’ equity 16.8 Retained earnings 8.0 Total $ 33.0 Total $ 33.0 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.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

' v a 1x 3 - ENG 04:48 30-04-2020 ... o X KG225 I KA 225 : x KB fix KC KD - KE KG KH KI KK KE UNIVERSITY PRODUCTS KL KNA 226 227 228 229 8% 230 231 232 233 234 CALCULATION OF VALUE OF DEBT COUPON PAR VALUE COUPON($) YTM YEARS TO MATURITY MARKET VALUE 5 0.4 9% 10 4.6791 [=PV(KG231,KG232,-KG230,-KG229)] 235 236 237 238 MARKET VALUE OF DEBT MARKET VALUE OF EQUITY MARKET VALUE OF PREFERRED STOCK TOTAL VALUE 4.6791 20 [1 X 20] 2.25 [(3/20 * 15] 26.9291 239 DEBT TO VALUE 17.38% [4.6791/26.9291] 240 241 242 243 244 245 COST OF EQUITY Rm-Rf = MARKET RISK PREMIUM =11% Rf = RISK FREE RATE = 7% ke = Rf +beta(Rm-Rf) ke = 7% + 0.7(11%) ke = 14.70% 246 247 248 1 ... coNvexity DGM beta VAR port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean | YIELD bond portfolio WACC RESI DIV ... + :

© v 13 a 1x 2 - 04:48 ENG 20-04-2020 ... II X o KH256 X ✓ fx KA KB KC KD KK KL KNA 243 244 245 KE KE KG KH KI COST OF EQUITY Rm-Rf = MARKET RISK PREMIUM =11% Rf = RISK FREE RATE = 7% ke = Rf +beta(Rm-Rf) ke = 7% +0.7(11%) ke = 14.70% 246 247 248 249 250 COST OF PREFERRED STOCK kp= DIVIDEND/PRICE kp= 3.00/15.00 kp= 20.00% 251 252 253 254 255 256 257 258 259 COST OF DEBT (AFTER TAX) YTM(1-t) = 9%*(1-0.21) kd = 7.11% b WACC CALCULATION 260 A DEBT PREFERRED STOCK COMMON STOCK 261 262 263 264 265 266 1 MARKET VALUE WEIGHTS COC (%) WEIGHTED COST B C B*C 4.6791 0.1738 7.11% 1.24% 2.25 0.0836 20.00% 1.67% 20 0.7427 14.70% 10.92% 26.9291 WACC = 13.82% ... coNvexity DGM beta VAR port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean | YIELD bond portfolio WACC RESI DIV ... + :