The following are balance sheets for the Genatron Manufacturing Corporation for

Question

The following are balance sheets for the Genatron Manufacturing Corporation   for the years 2010 and 2011: BALANCE   SHEET 2010 2011 Cash 50000 40000 Accounts   receivable 200000 260000 Inventory 450000 500000 Total   current assets 700000 800000 Fixed assets   (net) 300000 400000 Total assets 1000000 1200000 Bank loan,   10% 90000 90000 Accounts   payable 130000 170000 Accruals 50000 70000 Total   current liabilities 270000 330000 Long-term   debt, 12% 300000 400000 Common   stock, $10 par 300000 300000 Capital   surplus 50000 50000 Retained   earnings 80000 120000 Total   liabilities and equitiy 1000000 1200000 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 The following are balance sheets for the Genatron Manufacturing Corporation   for the years 2010 and 2011: BALANCE   SHEET 2010 2011 Cash 50000 40000 Accounts   receivable 200000 260000 Inventory 450000 500000 Total   current assets 700000 800000 Fixed assets   (net) 300000 400000 Total assets 1000000 1200000 Bank loan,   10% 90000 90000 Accounts   payable 130000 170000 Accruals 50000 70000 Total   current liabilities 270000 330000 Long-term   debt, 12% 300000 400000 Common   stock, $10 par 300000 300000 Capital   surplus 50000 50000 Retained   earnings 80000 120000 Total   liabilities and equitiy 1000000 1200000 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

Please find the solution here :

a. Equity =300,000 + 50,000 + 120,000 = $470,000.00

Net Debt = +400,000 -$40,000 = $360000

WACC =($470,000.00*16.5% +360000* 8.63%)/($470,000.00 +360000.00 )

=13.09%

b. Equity =20 * 30,000 = 600,000

Debt =$350,000

WACC =( 600000*16.5% +350000* 8.63%)/( 600000 +350000 )

= 13.60%

c.Using book value

WACC =($470,000.00*16.5% +360000*18%*(1-40%))/($470,000.00 +360000.00 )

=14.03%

Using market value

WACC =( 600000*16.5% +350000*18%*(1-40%))/( 600000 +350000 )

= 14.40%

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