The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011:
| Balance Sheet |
|
2010 |
|
2011 |
| Cash |
|
|
$50,000 |
|
$40,000 |
| Accounts receivable |
200,000 |
|
260,000 |
| Inventory |
|
450,000 |
|
500,000 |
| Total current assets |
|
700,000 |
|
800,000 |
| Fixed assets (net) |
|
300,000 |
|
400,000 |
| Total assets |
|
$1,000,000 |
|
$1,200,000 |
| Bank loan, 10% |
|
$90,000 |
|
$90,000 |
| Accounts payable |
|
130,000 |
|
170,000 |
| Accruals |
|
|
50,000 |
|
70,000 |
| Total current liabilities |
$270,000 |
|
$330,000 |
| Long-term debt, 12% |
300,000 |
|
400,000 |
| Common stock, $10 par |
300,000 |
|
300,000 |
| Capital surplus |
|
50,000 |
|
50,000 |
| Retained earnings |
|
80,000 |
|
120,000 |
| Total liabilities and equity |
$1,000,000 |
|
$1,200,000 |
a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax of new debt of 8.63 percent and a cost of common equity of 16.5 percent.
| Cost of equity |
|
16.50% |
|
Component |
|
Book value |
|
|
|
|
|
|
|
|
|
| After Tax Cost of debt |
8.63% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2010 |
|
|
|
|
Long term debt |
|
300,000 |
|
|
|
|
|
|
|
|
1,130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,430,000 |
b. The current market value of Genatron's long-term debt is $350,000. The common stock price is $20 per share and there are 30,000 shares outstanding. Calculate the WACC
c. Re-calculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt will be 18 percent, the company is in the 40 percent