1. Frank Inc. has the following abridged balance sheet : Current assets $3600, F
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Question
1. Frank Inc. has the following abridged balance sheet : Current assets $3600, Fixed assets : $6400, Total Assets: $10,000 Debt: $5200 Preferred stock :600 Common Equity: $4200 Total liabilities and equity : $10,000 For now, assume the market value of franks debt, preferred stock, and common equity all equal their book value. Also assume that all of Franks debt is long-term debt in the WACC calculation. Frank's cost of debt is 8.0%, its cost of preferred stocl is 7.7% and its cost of common equity is 16.3%. If frank's tax rate is 40% what is the firms WACC?2. Now assume that the market values of debt and preferred stock equal their book values, but the market value of equity exceeds its book value. In fact, the market-to-book ratio equals 2.0. If you use market-value-based capital structure weights, what is the firm's WACC?
3. Simon inc. Just issued a dividend of $2.61 per share on its stock. Analyst expect simon's dividend to grow indefinitely at a constant rate of 5% per year. If the stocks current price is $31.50, what is Simon's cost of equity using the dividend growth model ?
4.What is simons cost of equity using the new growth rate estimate taken from historical data? round the growth rate to the nearest hundredth as a percent, as in the previous question. 1. Frank Inc. has the following abridged balance sheet : Current assets $3600, Fixed assets : $6400, Total Assets: $10,000 Debt: $5200 Preferred stock :600 Common Equity: $4200 Total liabilities and equity : $10,000 For now, assume the market value of franks debt, preferred stock, and common equity all equal their book value. Also assume that all of Franks debt is long-term debt in the WACC calculation. Frank's cost of debt is 8.0%, its cost of preferred stocl is 7.7% and its cost of common equity is 16.3%. If frank's tax rate is 40% what is the firms WACC?
2. Now assume that the market values of debt and preferred stock equal their book values, but the market value of equity exceeds its book value. In fact, the market-to-book ratio equals 2.0. If you use market-value-based capital structure weights, what is the firm's WACC?
3. Simon inc. Just issued a dividend of $2.61 per share on its stock. Analyst expect simon's dividend to grow indefinitely at a constant rate of 5% per year. If the stocks current price is $31.50, what is Simon's cost of equity using the dividend growth model ?
4.What is simons cost of equity using the new growth rate estimate taken from historical data? round the growth rate to the nearest hundredth as a percent, as in the previous question.
Explanation / Answer
1) WACC = ( 52 * 8 * ( 1- 0.4 ) + 6 * 7.7 + 42 * 16.3 ) / 100 = 9.8%
2) WACC = ( 52 * 8 * ( 1- 0.4 ) + 6 * 7.7 + 84 * 16.3 ) / 142 = 11.73%
3) Cost of equity = (2.61*1.05/31.50) +0.05 = 13.70%
4) where is the historical data to get the growth rate.
According to one of the old questions I answered, I remember the historical growth rate was 8.08% and hence
the cost of equity is 16.78%
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