Question

Examine the following book-value balance sheet for Company X. The preferred stock currently sells for $30 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 2 million common shares outstanding. The market risk premium is 12%, the risk free rate is 8% and the firm’s tax rate is 40%.

Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $30 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 2 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firm's tax rate is 40% BOOK-VALUE BALANCE SHEET (Figures in $ millions) Liabilities and Net Worth Assets Bonds, coupon = 6 %, paid annually (maturity 10 years, current yield to maturity 8 % ) Preferred stock (par value $20 per share) Common stock (par value $e.10) Additional paid -in stockholders equity Retained earnings Cash and short-term securities Accounts receivable Inventories Plant and equipment 1.0 $15.0 4.0 3.0 8.e 24.e e.2 10.8 8.0 $37.0 $37.0 Total Total

1. What is the market debt-to-value ratio of the firm ?
2. What is University’s WACC?

Answer 1

Part a: financing Bond (working 1) preferrred stock (3000000 30/20) equity (2000000 20) Market value working 1: face value annual coupon = Current yleld to maturity Number of payments 12.986,975.58 15000000 6.0 % 4,500.000.00 8.0% 40,000,000.00 total market value 57.486.975.58 10 o value ratio#12986975.58/57486975.58 PV of bond= PV of interest+PV of maturity PV of interest market debt 22.59% annual interest (10000006% ) 900,000.00 XPVIFA(8 % ,10)* PV of interest b.calculation of WACC Financing 6.71008 after tax cost market value 6.039,073.26 WACC d-a*c ota PV of maturity value Par value X PVF(8% ,10)* Bond 4.80% | 12,986,975.58 22.59116% 1.08% 7.82786% 0.78% 69.58098%| 11.41 % preferrred stock 10.00% 500,000.00 15.000.000,0o 16.409 40.000,000.00 0.46319 equity 57,486,975.58 WACC PV of maturity value Total 13.28% 6.947.902.32 PV of bond/Price of bond working 2: after tax cost of Debt 8% (1-0.4) 12.986.975.58 4,80% *PVIFA(8 % ,10) (1-(1.08A-10))/o.08 (1-(1+r)A-n)/n 6.71008 cost of preferred stock (rp)=Dividend/market price-3/30 formula 10.00% PVIF(8 % ,10) formula 1/(1+r)An cost of equity (re) risk free rate+beta market risk premium 0.08+0.7 0.12 1/(1.08 10) 16.40% 0.46319 4H Sheet71 Sheet77 Sheet78 Sheet79 Sheet72 Sheet74 Sheet75 Sheet76 Sheet73 Sheet80 12:24 EN 05/06/2019