Question

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 $20 per share and has a beta of 0.8. There are 1 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firm's tax rate is 40% BOOK-VALUE BALANCE SHEET (Figures in $ millions) Liabilities and Net Worth Assets Bonds, coupon = 6%, paid annually (maturity = 10 years, current yield to maturity = 7%) Preferred stock (par value $10 per share) Cash and short-term securities $ 2.0 $10.0 3.0 Accounts receivable 5.0 Common stock (par value $0.40) Additional paid-in stockholders ' equity Retained earnings Inventories 9.0 0.4 Plant and equipment 21.0 14.6 9.0 $37.0 $37.0 Total Total a. What is the market debt-to-value ratio of the firm? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Market debt-to-value ratio b. What is University's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) WACC

Answer 1

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File Home Insert Page Layout Formulas Data Review View Add-Ins Cut Ea Copy - AutoSum A A Wrap Text Calibri 11 General Fill A Merge & Center Conditional Format Insert Delete Format Paste S % Cell Sort & Find & 2 Clear Format Painter er Select Formatting ble Styles Clipboard Font Alignment Number Shules Cells Editing KI136 Formula Bar KI ко KG КК КР KD KЕ КР Кн кі KL KM KN 135 136 UNIVERSITY PRODUCTS 137 138 CALCULATION OF VALUE OF DEBT 139 COUPON 6% 140 PAR VALUE 10 COUPON($) 0.6 141 142 YTM 7% YEARS TO MATURITY 143 10 144 MARKET VALUE 9.2976 PV(KG142,KG143,-KG141, -KG140)] 145 146 MARKET VALUE OF DEBT 9.2976 20 [1 x 20] 147 MARKET VALUE OF EQUITY 9 (3/10 30] 148 MARKET VALUE OF PREFERRED STOCK 38.2976 149 TOTAL VALUE 150 24.28% [9.2976/38.2976] DEBT TO VALUE 151 a 152 153 port future INDEX DIR right UTILITY, SHARPE, beta LEASING PV, FV, ANNUITY RESI ex di bond covexity DGM YIELD bond portfolo KE CAPM INTL CAP BUD dean stru WACC 130% Re erences: CF493 W 09:44 a ENG 05-06-2019

File Home Insert Page Layout Formulas Data Review View Add-Ins Cut - AutoSum A A Wrap Text Calibri 11 General Fill a Copy- A Merge & Center Conditional Format Insert Delete Format Paste Cell Sort & Find & BIU 2 Clear Format Painter er Select Formatting ble Styles Clipboard Font Alignment Number Shules Cells Editing KD152 KI КК KE кс Ко КЕ KP KG Кн K KL KM KN 152 153 Rm-Rf MARKET RISK PREMIUM =12 % COST OF EQUITY 154 Rf RISK FREE RATE 86 155 Rf +beta(Rm-Rf) ke = 156 8% +0.8(12%) 157 ke = ke = 158 17.60% 159 160 COST OF PREFERRED STOCK kp DIVIDEND/PRICE 3.00/30.00 161 kp= 162 163 kp= 10.00% 164 COST OF DEBT (AFTER TAX) 165 YTM(1-t)7%*(1-0.40) 166 kd 4.20% 167 168 169 b WACC CALCULATION WEIGHTS COc (%) WEIGHTED COST 170 MARKET VALUE port future INDEX PV, FV, ANNUITY DIR night UTILITY, SHARPE, beta bond covexityDGM LEASING RESI ex d YIELD bond portfolo KE CAPM INTL CAP BUD dean stru WACC 130% Re erences: CF135 W X 09:46 a ENG 05-06-2019

File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum A A Wrap Text Calibri 11 General Fill Copy BI U A- Merge & Center Conditional Format Insert Delete Format Paste S % Cell Sort & Find & 2 Clear Format Painter er Select Formatting ble Styles Clipboard Font Alignment Number Shules Cells Editing KD176 KC KI KK KE KC KE KP KG KH K KL KM KN 168 169 b WACC CALCULATION MARKET VALUE WEIGHTS COC (%) WEIGHTED COST 170 171 A c B*C 172 DEBT 9.2976 0.2428 4,20% 1.02% 173 PREFERRED STOCK 0.2350 10.00% 2.35% 17.60% 174 COMMON STOCK 20 0.5222 9.19% 175 38.2976 176 WACC= 12.56% 177 178 179 180 181 182 183 184 185 186 port future INDEX PV, FV, ANNUITY DIR right UTILITY, SHARPE, beta bond covexity DGM LEASING RESI ex d YIELD bond portfolo KE CAPM INTL CAP BUD clean stru WACC 130% Re erences: CF135 W 09:46 a ENG 05-06-2019