Question

Below are five comparable companies that compete in the Widget industry: Company V, Company W, Company X, Company Y, and Company Z. Assume the greater the assets on the balance sheet, the larger the company. Use the financial statement information in the table below to help answer questions 1-6. Debt/Equity YTM Total Assets Tax Rate Net Income Bea Book Value Dividends Company V Company W Company X Company Y Company Z 0.5385 3.0000 0.5625 0.4925 4.0000 8.0% 9.0% 65% 65% 11 .0% 100 1060 1000 970 100 30.0% 35.0% 35.0% 30.0% 300% 26 53 120 194 7 1.25 1.35 1.10 1.15 1.40 65 265 640 650 20 3 15 40 64 0 14.3% 15.2% 12.9% 13.4% 15.6%

1. The company with the lowest weighted average cost of capital is:

   1. CompanyV

   2. Company W

   3. CompanyX

   4. CompanyY

   5. Company Z

Answer 1

weighted average cost of capital=(cost of debt*wt of debt)+(cost of equity * wt of equity)
cost of debt=YTM*(1-tax)
Cost of equity= Re
Wt of debt=(Debt to equity)/(1+(debt to equity))
Wt of equity=1- wt of debt

lowest average cost of capital is company W