The following are balance sheets for the Genatron Manufacturing Corporation for
ID: 2659205 • Letter: T
Question
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 cost of new debt of 8.63
percent and a cost of common equity of 16.5 percent.
b. The current market value of Genatron
Explanation / Answer
EQUITY FOR 2011 = 300000+50000+120000
=470000
DEBT FOR 2011 = 400000
A]WACC FOR 2011 = WE*KE + WD*KD
=[470000/(470000+400000)]*16.5 + [400000/(470000+400000)]*8.63
=8.91 + 3.97
=12.88%
B]MARKET VALUE OF DEBT = 350000
MARKET VALUE OF STOCK = 20*30000 = 600000
WACC FOR 2011 = WE*KE + WD*KD
=[600000/(600000+350000)]*16.5 + [350000/(600000+350000)]*8.63
=10.42 + 3.18
=13.6%
C]AFTER TAX COST OF DEBT = 18*0.60
=10.8%
BEFORE TAX OF EQUITY = 21/0.6
=35%
WACC USING BOOK VALUE FOR 2011
=[470000/(470000+400000)]*35 + [400000/(470000+400000)]*10.8
=18.91 + 4.97
=23.88%
WACC USING MARKET VALUE FOR 2011
=[600000/(600000+350000)]*35 + [350000/(600000+350000)]*10.8
=22.11 + 3.99
=26.1%
NOTE:-COST OF EQUITY IS BEFORE TAX ONLY.
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