Here is Establishment Industries’ market-value balance sheet (Figures in million

Question

Here is Establishment Industries’ market-value balance sheet (Figures in millions):

Here is Establishment Industries’ market-value balance sheet (Figures in millions):

The debt is yielding 6.3%, and the cost of equity is 14.7%. The tax rate is 33%. Investors expect this level of debt to be permanent.

What is Establishment’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

How would the market-value balance sheet change if Establishment retired all its debt? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Here is Establishment Industries’ market-value balance sheet (Figures in millions):

Explanation / Answer

Post tax cost of debt is 6.3%×(1-0.33) =4.22%

Cost of equity is 14.7%

WACC is % of debt × cost of debt + % of equity×cost of equity

= 0.3362 ×4.22% + 0.6638×14.7% = 1.42% + 9.76% = 11.18%

B.Assumption::The debt is retired by issuing new equity worth 1160.

So Debt =0

Equity = 1160+2290=3450

TOTAL =3450

Net working capital =750

Long tern asset =2700

Value of firm = 3450

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.