fm10 7 - debt figure for calculating weights because in the...

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10-17 Several steps are involved in the solution of this problem. Our solution follows: Step 1 . Establish a set of market value capital structure weights. In this case, A/P and accruals should be disregarded because they are not sources of financing from investors. Instead of being incorporated into the WACC, they are accounted for when calculating cash flows. For this firm, short-term debt is used to finance seasonal goods, and the balance is reduced to zero in off-seasons. Therefore, this is not a source of permanent financing. and should be disregarded when calculating the WACC. Debt : The long-term debt has a market value found as follows: V 0 = = + 40 1 t 40 t ) 06 . 1 ( 000 , 1 $ ) 06 . 1 ( 40 $ = $699, or 0.699($30,000,000) = $20,970,000 in total. Notice that short-term debt is not included in the capital structure for this company. We usually include short-term debt in the total
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Unformatted text preview: debt figure for calculating weights because in the absence of any other information, we assume the short-term debt will be rolled over from year to year. In this case, however, the company does not use short-term debt as a permanent source of financing. Indeed, as stated in the problem, the short-term debt balance is zero off-season. In such a situation neither the lender nor the company believes that the debt balance will be rolled over from year to year as the loan is closed out each off-season and so it is not considered a component of the capital structure. Preferred Stock : The preferred has a value of P ps = 4 / 11 . 2 $ = $72.73. There are $5,000,000/$100 = 50,000 shares of preferred outstanding, so the total market value of the preferred is 50,000($72.73) = $3,636,500. Answers and Solutions: 10 - 7...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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