Question 1: Capital Structure. Examine the following book-value balance sheet for University Products, Inc. What is the capital structure of the firm on the basis of market values? The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1 million common shares outstanding.
BOOK VALUE BALANCE SHEET
(all values In millions)
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Assets
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Liabilities and Nat Worth
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Cash and shon•term securities
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$ 1
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Bonds. coupon = 8%. paid annually (maturity = 10 years.
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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
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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 $.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'
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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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$32
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Total
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$32.0
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Question 2: Calculating WACC. Turn back to University Products’s balance sheet from the previous prob- lem. If the preferred stock pays a dividend of $2 per share, the beta of the common stock is .8, the market risk premium is 10%, the risk-free rate is 6%, and the firm’s tax rate is 40%, what is University’s weighted-average cost of capital?