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 .7. There are 2 million common shares outstanding. The market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 40%.
| BOOK-VALUE BALANCE SHEET |
| (Figures in $ millions) |
| Assets |
|
|
|
Liabilities and Net Worth |
|
|
|
| Cash and short-term securities |
$ |
1.0 |
|
Bonds, coupon = 7%, paid annually (maturity = 10 years, current yield to maturity = 8%) |
$ |
5.0 |
|
| Accounts receivable |
|
4.0 |
|
Preferred stock (par value $10 per share) |
|
3.0 |
|
| Inventories |
|
8.0 |
|
Common stock (par value $.10) |
|
.2 |
|
| Plant and equipment |
|
24.0 |
|
Additional paid-in stockholders' equity |
|
17.8 |
|
| |
|
|
|
Retained earnings |
|
11.0 |
|
|
|
|
|
|
|
|
|
| Total |
$ |
37.0 |
|
Total |
$ |
37.0 |
|
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 ratio %
b. What is University's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
WACC %