fm10 6 - Alternatively, using a financial calculator, input...

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Answers and Solutions: 10 - 6 10-15 a. Common equity needed: 0.5($30,000,000) = $15,000,000. b. Cost using r s : After-Tax Percent × Cost = Product Debt 0.50 4.8%* 2.4% Common equity 0.50 12.0 6.0 WACC = 8.4 % *8%(1 - T) = 8%(0.6) = 4.8%. c. r s and the WACC will increase due to the flotation costs of new equity. 10-16 The book and market value of the current liabilities are both $10,000,000. The bonds have a value of V = $60(PVIFA 10%,20 ) + $1,000(PVIF 10%,20 ) = $60([1/0.10]-[1/(0.1*(1+0.10) 20 )]) + $1,000((1+0.10) -20 ) = $60(8.5136) + $1,000(0.1486) = $510.82 + $148.60 = $659.42.
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Unformatted text preview: Alternatively, using a financial calculator, input N = 20, I = 10, PMT = 60, and FV = 1000 to arrive at a PV = $659.46. The total market value of the long-term debt is 30,000($659.46) = $19,783,800. There are 1 million shares of stock outstanding, and the stock sells for $60 per share. Therefore, the market value of the equity is $60,000,000. The market value capital structure is thus: Short-term debt $10,000,000 11.14% Long-term debt 19,783,800 22.03 Common equity 60,000,000 66.83 $89,783,800 100.00 %...
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