Question 1: Calculating WACC. Find the WACC of William Tell Computers. The total book value of the firm's equity is $10 million; book value per share is $20. The stock sells for a price of $30 per shales and the cost of equity is 15 percent. The firm's bonds have a par value of $5 million and sell at a price of 110 percent of par. The yield to maturity on the bonds is 9 percent, and the firm's tax rate is 40 percent.
Question 2: Capital Structure. Examine the following book-value balance sheet for University Products, Inc. What is the capital structure of the firm based on market values? The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are one million common shares outstanding.
BOOK VALLI E BALANCE SHEET
(all values in millions)
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Assets
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|
liabilities and Net Worth
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|
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Cash and short-term securities
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$ 1
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Bonds, coupon = 8%. paid
annually (maturity = 10 years. current yield to maturity = 9%)
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$10.0
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Accounts receivable
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3
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Preferred stock (par value $20 per share)
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2.0
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Inventories
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7
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Common stock (par value 5.10)
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.1
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Plant and equipment
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21
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Additional paid in stockholders' capital
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9.9
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Retained earnings
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10.0
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Total
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132
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Total
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$32.0
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