Question

Finance 301-Handout #20 Assignment Weighted Average cost of capital (WACC) Set your calculator for 3 or more decima Moser Corporation. Below is the most recent balance sheet for Accounts Payable Short-term Debt Long-term Debt Common Stock Retained Earnings s 4,000,000 6,000,000 28,000,000 1,000,000 41,000,000 s30,000, 000 50,000, 000 Current Assets Net Fixed Assets $80 000,000 Total Financing Total Assets The long-term debt consists of 28,000 bonds with a $1,000 par value rate of 58, and a yield of 78. The comm Just paid a $5 per share dividend. Common dividends have grown at a 3 rate over the past several years, and this is expected to continue. The firm's tax rate is 218. a couporn stock sells for $60 per share and % an nual al. Estimate the firn's weighted average cost of capit

No info about short term debt, take the value of short term debt as it is

Answer 1

Cost of equity-
Gordon growth model
P= D1/ (r-g)
60= 5*(1+3%)/(r-3%)
r= 5*(1+3%)/60+3%
r= 11.58%

Cost of debt
Pre tax yield= 7%
tax rate= 21%
Post tax cost of debt= 7%*(1-21%)
Post tax cost of debt= 5.53%

Type of Capital	Book value	% of Total Capital	Cost of capital	Weighted cost of capital
LT debt	28,000,000	40.00%	5.53%	2.21%
Common stock	1,000,000	1.43%	11.58%	0.17%
Retained earnings	41,000,000	58.57%	11.58%	6.78%
Total	70,000,000	100.00%		9.16%

Hence, the WACC is 9.16% for the company

Notes-

The information available about the firm's capital structure is very basis. Hence, we need to make certain assumptions before we can proceed.
Short term debt and accounts payable need not be considered as a part of capital structure. These may be non-interest bearing liabilities and are usually considered as a part of sources of financing for the company.
Long terms debt is carried on book value. Since the yield and coupon rate are not equal, the market price is also not equal to par value for this bond. We need to consider the book value of LT debt as well as equity.
Equity capital consists of common stocks plus retained earnings. The cost of capital for retained earnings is same as that of common stock. When we consider market value of equity, the value of retained earning is usually accounted for in share price