Question

Problem 13-7 WACC (LO1) nts Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $10 per share and has a beta of 0.9. There are 4 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm's tax rate is 21% Assets look $ 3.0 $20.0 Print Cash and short-term securities Accounts receivable Inventories Plant and equipment BOOK-VALUE BALANCE SHEET (Figures in 5 millions) Liabilities and Net Worth Bonds, coupon - 5%, paid annually (naturity = 10 years, current yield to maturity = 7%) Preferred stock (par value $20 per share) Common stock (par value $e.10) Additional paid-in stockholders' equity Retained earnings Total orences S . Total a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? (For all the requirements, do not round Intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

B23 ESUMPRODUCT(B21:D21,B22:22) B D 10 4000000 =B2*B1 0.9 0.04 0.08 =B5+B4*B6 15 1 Price per common share 2 Number of common shares outstanding 3 Market Value of common stock 4. Beta 5 Risk free rate 6 Market Risk Premium 7 Cost of common stocks 8 Current Market Price of preferred Stock 9 Preffered Dividend paid 10 Cost of Preffered stocks 11 Book Value of Preferred Shares 12 Par Value per preferred share 13 Numver of preferred shares 14 Market Value of preferred shares 15 Pre Tax Cost of Debt 16 Total Debt 17 Tax rate 18 After Tax Cost of bet 19 20 21 Market Weights 22 Cost 23 WACC 24 25 Market Debt to Value =B9/B8 3000000 20 =B11/B12 =B13*B8 0.05 20000000 0.21 =B15*(1-B17) Common Share |=B3/($B$3+$B$14+$B$16) |=B7 =SUMPRODUCT(B21:D21,B22:022) Preffered Share =B14/($B$3+$B$14+$B$16) =B10 Debt =B16/($B$3+$B$14+$B$16) =B18 =B16/(B16+B3)