The table below shows a book balance sheet for the Wishing Well Motel chain. The company’s...
The table below shows a book balance sheet for the
Wishing Well Motel chain. The company’s long-term debt is secured
by its real estate assets, but it also uses short-term bank loans
as a permanent source of financing. It pays 10% interest on the
bank debt and 8% interest on the secured debt. Wishing Well has 10
million shares of stock outstanding, trading at $88 per share. The
expected return on Wishing Well’s common stock is 21%. (Table
figures in $ millions.)
| Cash and marketable securities | $ | 160 | Bank loan | $ | 300 | ||
| Accounts receivable | 320 | Accounts payable | 180 | ||||
| Inventory | 50 | Current liabilities | $ | 480 | |||
| Current assets | $ | 530 | |||||
| Real estate | 2,550 | Long-term debt | 2,450 | ||||
| Other assets | 150 | Equity | 300 | ||||
| Total | $ | 3,230 | Total | $ | 3,230 | ||
Calculate Wishing Well’s WACC. Assume that the book and market
values of Wishing Well’s debt are the same. The marginal tax rate
is 21%. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 1 decimal
place.)
Homework Answers
Total market value of Wishing Well = Market Value of long term debt + Market Value of bank loan + Market Value of Equity = [$2,450 + $300 + ($88 * 10)] millions = $3,630 millions
Weight of long term debt = Market Value of long term debt/ Total value = $2,450/$3,630 = 0.674931129476584
Weight of bank loan = Market Value of bank loan/ Total value = $300/$3,630 = 0.082644628099174
Weight of Equity = Market Value of bank loan/ Total value = $880/$3,630 = 0.242424242424242
WACC = 0.674931129476584 * 8% * (1 - 21%) + 0.082644628099174 * 10% * (1 - 21%) + 0.242424242424242 * 21% = 0.04265564738292 + 0.006528925619835 + 0.050909090909091 = 0.100093663911846
Wishing Well’s WACC = 10%
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