Question 24 1 pts Jake the Dog Inc. is investing in a new portable iguana killin

ID: 2617663 • Letter: Q

Question

Question 24 1 pts Jake the Dog Inc. is investing in a new portable iguana killing machine that will cost $200,000. The machine has a useful life of 6 years and falls into the 5-year property class for the depreciation purposes. The IRS MACRS schedule for the six years is: (1) 20%, (2) 32%, (3) 19.2%, (4) 11.52%, (5) 11.52%, (6) 5.76%. It will generate $50,000 per year of savings for Jake and can be sold for $50,000 at the end of the 6-year period. Jake's corporate tax rate is 34%. In addition, Jake has 2000 outstanding 9% annual coupon bonds with a $1000 par value, 20 years to maturity and a price of $1085. Jake also has 60 shares of common stock outstanding that is selling for $45 pers of 2.45 (its Jake! he is a risky dog-dude!), the expected market return is 12% and the risk- free rate is 5%. Finally, Jake has 36,000 shares preferred stock outstanding that pays a 5.5% dividend and sells for $40 per share. What are the market value weights of each security component of the WACC for Equity, Debt and Preferred Stock? are. This stock has a beta O 348 Equity, 438 Debt, 214 Preferred .448 Equity, .334 Debt, .218 Preferred 0 .543 Equity, .345 Debt, .112 Preferred 428 Equity, .344 Debt, .228 Preferred 453 Equity, .365 Debt, 182 Preferred

Explanation / Answer

The Answer is “ 0.428 Equity, 0.344 Debt, 0.228 Preferred”

Weights of each security component of the WACC for Equity, Debt and Preferred stock

Component

Market Value

Equity [60,000 shares x $40 ]

2,700,000

Debt [2,000 Bonds x $1,085]

2,170,000

Preferred Stock [36,000 shares x $40]

1,440,000

Total Market Value

6,310,000

Weight of Equity = [$27,00,000 / 63,10,000] = 0.428

Weight of Debt = [$21,70,000 / 63,10,000] = 0.344

Weight of Preferred Stock = [$14,40,000 / 63,10,000] = 0.228