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 2 million common shares outstanding. The market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 21% Assets $ 1.0 $ BOOK-VALUE BALANCE SHEET (Figures in 5 millions) Liabilities and Net Worth Bonds, coupon = 7%, paid annually (maturity = 10 years, current yield to maturity = 8%) Preferred stock (par value $10 per share) Common stock (par value $0.10) Additional paid in stockholders' equity Retained earnings Total Cash and short-term securities Accounts receivable Inventories Plant and equipment 5. 3.e 24.e 17.8 $37.0 $32. Total Q. 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 is complete but not entirely correct. Market debato-value ratio 0.21 12.20 % % b. WACC

Answer 1

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X 2 E. Insert = Page Layout ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Formulas Data Review View - 2x % Cut Dr General Wrap Text FMerce Merge & Center - Center s $ -% % 4.0 .00 . Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing -11AA = = = U B- A E E E Font fix KB KC KD Find & Select Alignment Number Calibri E Copy Paste Format Painter B I Clipboard KG223 - JZ KA 222 223 224 225 Cells KE KE KG KH KI K Formula Bar KL KM KO UNIVERSITY PRODUCTS 226 227 228 229 230 231 CALCULATION OF VALUE OF DEBT COUPON PAR VALUE COUPON(S) YTM YEARS TO MATURITY MARKET VALUE 7% 5 0.35 8% 10 232 233 4.6645 [=PV(KG231,KG232,-KG230,-KG229)] 234 235 236 MARKET VALUE OF DEBT MARKET VALUE OF EQUITY MARKET VALUE OF PREFERRED STOCK TOTAL VALUE 4.6645 40 [2 x 20) 4.5 [(3/10 * 15] 49.1645 237 238 239 240 DEBT TO VALUE 9.49% [4.6645/49.1645] 241 242 R M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right KE CAPM UTILITY, SHARPE, beta ferences: CF670 Rea clean YIELD bond portfolio cap stru WACC RESI el BOI 120% V- ...Rag m * * O ENG 08-11-2019

ke - Microsoft Excel (Product Activation Failed) Add-Ins Review View - 2x = V General = * Wrap Text *Merge & Center - Merge Center SF $ % % 4:0 .00 8. Insert Delete Format File Home Insert Page Layout Formulas Data % Cut Calibri 11 A A = Ea Copy Paste Format Painter BI U DA Clipboard Font CD KD241 for JZ KA KB KC KD Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells KE KE KG KH KI KI K K KL KM ka 241 242 243 244 245 COST OF EQUITY Rm-Rf = MARKET RISK PREMIUM = 10% Rf = RISK FREE RATE = 6% ke = Rf+beta(Rm-Rf) ke = 6% +0.7(10%) 13.00% COST OF PREFERRED STOCK kp= DIVIDEND/PRICE kp= 3.00/15.00 kp= 20.00% 246 247 248 249 250 251 252 253 254 255 256 257 258 259 COST OF DEBT (AFTER TAX) YTM(1-t) = 8%*(1-0.21) kd = 6.32% 260 261 HI Red M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: CF670 YIELD bond portfolio cap stru WACC BOU 120% RESI el -_- DO 4 * 4 OENG 08-11-2019

X 2 E. Insert = Page Layout ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Formulas Data Review View - 2x % Cut Dr General Wrap Text Merge Merge & Center - Center SF $ -% % 4:0 .00 . Insert Delete Format Cell Styles Calibri E Copy Paste Format Painter B I Clipboard KG269 - JZ KA Conditional Format Formatting as Table Styles -11AA = = = U B- A Font five KB KC KD Find & Select Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Alignment Number Cells KE KE KG KH KI K KK KLKM Ka 257 WACC CALCULATION 258 259 260 261 262 263 264 265 DEBT PREFERRED STOCK COMMON STOCK MARKET VALUE WEIGHTS COC (%) WEIGHTED COST B C B*C 4.6645 0.0949 6.32% 0.60% 4.5 0.0915 20.00% 1.83% 40 0.8136 13.00% 10.58% 49.1645 WACC = 13.01% 266 267 268 269 270 271 272 273 274 275 276 277 M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean HI Rea KE CAPM UTILITY, SHARPE, beta ferences: CF135 YIELD bond portfolio cap stru WACC BOI 120% RESI el V- DO 4 * 4 OENG 08-11-2019