4-1sol - Debt / Enterprise Value 32.89% Equity / Enterprise...

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PROBLEM 4-1 Given December 31, 2006 Liabilities and Owner's Capital Current liabilities Accounts payable $8,250,000 Notes payable - - Other current liabilities` 7,266,000 Total current liabilities $15,516,000 $- $420,000,000 $434,091,171 Total liabilities $435,516,000 $434,091,171 Owners' capital $40,000,000 Paid-in-capital 100,025,000 Accumulated earnings 255,000,000 Total owners' capital $395,025,000 $900,000,000 Total liabilities and owners' capital $830,541,000 $1,334,091,171 Capital Market Data Treasury Bond Yield 5.42% Market Risk Premium 5.00% Unlevered equity beta (SIC 4924) 0.90 Stock price $22.50 Market capitalization $900,000,000 Yield on debt 8.00% Bond beta 0.30 Short-term interest bearing debt $- New long-term debt total $- Tax Rate 40.00% Solution Step 1: Evaluate the capital structure weights $1,320,000,000
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Unformatted text preview: Debt / Enterprise Value 32.89% Equity / Enterprise Value 67.11% Step 2: Estimate the costs of Financing Debt (after taxes) 4.80% Equity 10.76% Levered equity beta 1.07 Balance Sheet (Book Values) Invested Capital (Market Values) Long-term debt (8.5% interest paid semi-annually, due in 2015) Common stock ($1 par value per share) Enterprise Value = Market Capitalization + Debt Step 3: Calculate the WACC WACC 8.80% Capital Structure Weight Source of Capital (Proportion) After-Tax Cost Debt 32.89% 4.80% Equity 67.11% 10.76% WACC Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Weighted After-Tax Cost 0.01579 0.07221 8.80%...
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This note was uploaded on 07/24/2009 for the course FIN FIN taught by Professor Robbani during the Summer '09 term at University of Maryland Baltimore.

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4-1sol - Debt / Enterprise Value 32.89% Equity / Enterprise...

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