Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):
2021 | ||||
Current assets | $ | 2,000 | ||
Net fixed assets | 3,000 | |||
Total assets | $ | 5,000 | ||
Accounts payable and accruals | $ | 900 | ||
Short-term debt | 100 | |||
Long-term debt | 1,500 | |||
Preferred stock (10,000 shares) | 200 | |||
Common stock (50,000 shares) | 1,125 | |||
Retained earnings | 1,175 | |||
Total common equity | $ | 2,300 | ||
Total liabilities and equity | $ | 5,000 |
Skye's earnings per share last year were $2.65. The common stock sells for $50.00, last year's dividend (D0) was $1.65, and a flotation cost of 12% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 10%. Skye's preferred stock pays a dividend of $2.75 per share, and its preferred stock sells for $25.00 per share. The firm's before-tax cost of debt is 8%, and its marginal tax rate is 25%. The firm's currently outstanding 8% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye's beta is 1.504. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.6 million.
If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)
WACC1: ________________ %
WACC2: _________________ %
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Here is the considered 2011 balance sheet for Skye Computer Company ( in thousands of dollars):Current Assets: 2000; Net Fixed Assets: 3000; Total Assets; 5000.Current liabilities: 900; long term debt: 1200; Preferred stock(10000 shares): 250; common stock (50000 shares): 1300; retained earnings: 1350; total common equity:2650; total liabilities and equity: 5000Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year's dividend (Do) was $2.10, and a flotation cost of 10% would be requiredto sell...
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