Problems 1 to 5
You are employed by ABC Inc. Your boss has asked you to estimate the weighted average cost of capital for the company. Following are balance sheets and some information about CGT.
Assets
Current assets $30,000,000
Net plant, property, and equipment $100,000,000
Total Assets $130,000,000
Liabilities and Equity
Accounts payable $10,000,000
Accruals $10,000,000
Current liabilities $20,000,000
Long term debt (40,000 bonds, $1,000 face value) $40,000,000
Total liabilities $60,000,000
Preferred Stock (100,000 shares, $100 face value) $10,000,000
Common Stock (10,000,000 shares) $30,000,000
Retained Earnings $30,000,000
Total shareholders equity $70,000,000
Total liabilities and shareholders equity $130,000,000
You check The Wall Street Journal and see that ABC stock is currently selling for $8.00 per share and that ABC bonds are selling for $950.0 per bond. These bonds have a 8 percent coupon rate, with semi-annual payments. The bonds mature in twelve years. The preferred stock has an unlimited life and pays an 6 percent annual coupon. The preferred stock sells for $95. The beta for your company is approximately equal to 2. The yield on a 20-year Treasury bond is 4.0 percent. The expected return on the stock market is 8.0 percent. ABC is in the 40 percent tax bracket.
WHAT IS THE FIRM'S COST OF COMMON STOCK, Ks?
10%
11%
12%
13%
14%
WHAT IS THE COST OF PREFERRED STOCK, Kps?
5.46%
4.89%
3.99%
6.32%
8.21%
WHAT IS THE AFTER-TAX COST OF DEBT, Kd?
5.21%
4.06%
7.89%
2.02%
6.77%
WHICH OF THE FOLLOWING IS THE BEST ESTIMATE FOR THE WEIGHTS TO BE USED WHEN CALCULATING THE WACC?
We = 0.63, Wd = 0.30, and Wps = 0.07
We = 0.68, Wd = 0.23, and Wps = 0.09
We = 0.68, Wd = 0.30, and Wps = 0.02
We = 0.66, Wd = 0.28, and Wps = 0.06
We = 0.66, Wd = 0.26, and Wps = 0.08
What is the best estimate of the WACC for...