Financial
Autor: Junrong Zhuang • December 1, 2016 • Exam • 1,934 Words (8 Pages) • 666 Views
FINALS:
- Mark Tool has on its books the amount and specific (after-tax) costs shown in the following table for each source of capital.
Source of Capital | Book Value | Specific Cost |
Long-Term Debt | $ 700, 000 | 5.3% |
Preferred Stock | 50, 000 | 12.0 |
Common Stock Equity | 650, 000 | 16.0 |
- Calculate the firm’s weighted average cost of capital using book value weights.
- Explain how the firm can use this cost in the investment decision-making process.
WACC = Equity proportion * Cost of equity + Debt proportion * Cost of debt * (1-Tax)
So in you case it would be:
A. wacc = 700,000/1400,000*0.053+50,000/1400,000*0.12+650,000/1400,000*0.16 = 10.51%
B.Investment decision should depend on IRR of the project. If IRR is higher than WACC, such investment should be completed.
- Peter Company has compiled the information shown in the following table.
Source of Capital | Book Value | Market Value | After-Tax cost |
Long-Term Debt | $ 4, 000, 000 | $ 3, 840, 000 | 6.0% |
Preferred Stock | 40, 000 | 60, 000 | 13.0 |
Common Stock Equity | 1, 060, 000 | 3, 000, 000 | 17.0 |
Total | $ 5, 100, 000 | $ 6, 900, 000 |
- Calculate the weighted average cost of capital using book value weights.
- Calculate the weighted average cost of capital using market value weights.
- Compare the answers obtained in a and b. Explain the differences.
Book values
Weight of debt = 4m/5.1m = 78.43%
Weight of pref stock = 40000/5.1m= 0.7843%
Weight of common stock = 1060000/5.1m = 20.78%, these should sum to 100%
a) Book values
= (78.43% * 6%) + (0.7843% * 13%) + (20.78% * 17%) = 8.34%
b) market values
Weight of debt = 3.84m/6.9m = 55.65%
Weight of pref stock = 60000/6.9m= 0.8696%
Weight of common stock = 3m/6.9m = 43.48%, these should sum to 100%
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