Question

please answer part a and b of the question attached below

Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $30 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.9. There are 2 million common shares outstanding. The market risk premium is 9%, the risk-free rate is 5%, and the firm's tax rate is 40% BOOK-VALUE BALANCE SHEET (Figures in $ millions) Liabilities and Net Worth Assets Bonds, coupon = (maturity= 10 years, current yield to maturity = 84) Preferred stock (par value $15 per share) 6, paid annually 2.0 5.0 Cash and short-term securities 3.0 3.0 Accounts receivable 7.0 Common stock (par value $0.20) Additional paid-in stockholders equity 0.4 Inventories Plant and equipment 21.0 13.6 Retained earnings 11.0 $33.0 $33.0 Total Total a. What is the market debt-to-value ratio of the firm? (Do not round intermediate calculations. Enter your answer as rounded to 2 decimal places.) percent Market debt-to-value ratio b. Wh places.) rou WACC? (Do mediate calculations. decimal in your answer as a percent rounded WACC

Answer 1

K H G D B A 1 Weight Cost 2 0.49% 4,80% 10.23% Debt Par value 9.90% 13.10% 75.60% 6% Equity Rate 4 1.42% 10.00% 14.17% Preferenc 8% YTM 5 10 Years 6 11.81% 4.33 Market value of debt 7 8 2 No of equity shares 9 16 Price 10 32 Market value of equity 11 12 0.2 No of preference shares 13 30 Price 14 Market value of preference shares 15 16 42.33 Total market value 17 10.23% Market debt to value 18 19 20 21

G A D F F 1 Weight C7/$C$17 8%*(1-40%) =F3*G3 -C11/$C$17 5%+ 9%*0.9 =F4*G4 b 2 Cost a Par value Debt 3 5 4 Rate 0.06 Equity Preference =C15/$C$17 =3/30 F5*G5 5 YTM 0.08 6 Years 10 Market value of debt =PV(C5,C6,-C3*C4,-C3) SUM(H3:H5) 7 8 -0.4/0.2 No of equity shares 10 Price 16 Market value of equity =C9*C10 11 12 3/15 No of preference shares 13 14 Price 30 Market value of preference shares C13*C14 15 16 17 Total market value C15+C11+C7 -C7/C17 Market debt to value 18 19 20