CH 13 - HW PROBLEM SOLUTIONS - 1 CHAPTER 13 PROBLEMS WACC Calculations Example 13-1(page 561 2 The Aztec Corporation has the following capital

CH 13 - HW PROBLEM SOLUTIONS - 1 CHAPTER 13 PROBLEMS WACC...

This preview shows page 1 - 4 out of 10 pages.

1 C H A P T E R 1 3 : P R O B L E M S WACC Calculations: Example 13-1 (page 561) 2. The Aztec Corporation has the following capital components and costs. Calculate Aztec's WACC. Component Value Cost Debt $23,625 12.0% Preferred Stock $ 4,350 13.5% Common Equity $52,275 19.2% SOLUTION: Component Value Weights Cost Factors Debt $23,625 .294 12.0% 3.53 Preferred Stock $ 4,350 .054 13.5% .73 Common Equity $52,275 .652 * 19.2% 12.52 $80,250 1.000 16.78 Use WACC = 16.8% *Rounding sometimes causes the weights to sum to a figure slightly different from 1.000. When that happens we generally round one figure the wrong way to show weights that add to exactly 1.000. 3. Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/x3: Long Term Debt $65,000,000 Preferred Stock $15,000,000 Common Stock $40,000,000 Paid in Excess $15,000,000 Retained Earnings $37,500,000 Calculate Willerton’s capital structure based on book values. SOLUTION ($M) % Debt $65.0 37.7 Preferred Stock 15.0 8.7 Equity 92.5 53.6 Total $172.5 100.0
Image of page 1
2 Market Value Based Capital Structure: Example 13-2 (page 564) 4. Referring to Willerton Industries of the previous problem, the company’s long term debt is comprised of 20-year $1,000 face value bonds issued seven years ago at an 8% coupon rate. The bonds are now selling to yield 6%. Willerton’s preferred is from a single issue of $100 par value, 9% preferred stock that is now selling to yield 8%. Willerton has four million shares of common stock outstanding at a current market price of $31. Calculate Willerton’s market value based capital structure. SOLUTION: a. Market value of debt : n = 13 x 2 = 26 FV = 1,000 I/Y = 6/2 = 3 PMT = 1,000 x 8%/2 = 40 PV = ? = 1,178.77 Market value of preferred stock Number of preferred shares from previous problem $15M/$100 = 150,000 $9/.08 = $112.50 Total market values Market Value % Debt $1,178.77 x 65,000 $76,620,050 35.2 Preferred stock $112.50 x 150,000 16,875,000 7.8 Equity $31 x 4,000,000 124 ,000,000 57.0 $217,495,050 100.0 5. Again referring to Willerton of the two previous problems, assume the firm’s cost of retained earnings is 11% and its marginal tax rate is 40%, calculate its WACC using its book value based capital structure ignoring floatation costs. Make the same calculation using the market value based capital structure. How significant is the difference? SOLUTION: Book Value Debt .377 x 6.0% x (1 - .4) 1.36 Preferred .087 x 8% .70 Equity .536 x 11% 5.90 WACC 7.96% Market Value Debt .352 x 6.0% x (1 - .4) 1.27 Preferred .078 x 8% .62 Equity .57 x 11% 6.27 WACC 8.16% In this case, WACCs based on book and market values are only 0.2% apart, a relatively insignificant difference.
Image of page 2
The Cost of Capital Cost of Debt: Example 13-3 (page 567) 11. The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite’s marginal tax rate including both federal and state taxes is 38%. What is the firm’s cost of debt? SOLUTION : The cost of debt is the return received by investors reduced by the company’s tax savings due to the fact that interest is tax deductible.
Image of page 3
Image of page 4

You've reached the end of your free preview.

Want to read all 10 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes