Given December 31, 2014 Liabilities and Owner\'s Capital \" Balance Sheet (Book

Question

Given December 31, 2014 Liabilities and Owner's Capital " Balance Sheet (Book Values) " "Invested Capital (Market Values)" Current liabilities Accounts payable $8,250,000 Notes payable - - Other current liabilities` 7,266,000 Total current liabilities $15,516,000 $- "Long-term debt (8.5% interest paid semi-annually, due in 2015)" $420,000,000 $434,091,171 Total liabilities $435,516,000 $434,091,171 Owners' capital Common stock ($1 par value per share) $40,000,000 Paid-in-capital 100,025,000 Accumulated earnings 255,000,000 Total owners' capital $395,025,000 $900,000,000 Total liabilities and owners' capital $830,541,000 $1,334,091,171 Capital Market Data Treasury Bond Yield 5.42% Market Risk Premium 5.00% Unlevered equity beta (SIC 4924) 0.90 Stock price $22.50 Market capitalization Yield on debt 8.00% Bond beta 0.30 Short-term interest bearing debt New long-term debt total $- Tax Rate 40.00% Solution Step 1: Evaluate the capital structure weights Enterprise Value = Market Capitalization + Debt Debt / Enterprise Value Equity / Enterprise Value Step 2: Estimate the costs of Financing Debt (after taxes) Equity Levered equity beta Step 3: Calculate the WACC WACC Capital Structure Weight Source of Capital (Proportion) After-Tax Cost Weighted After-Tax Cost Debt Equity WACC

Explanation / Answer

Answer:

Step 1: Evaluate the capital structure weights Enterprise Value = Market Capitalization + Debt $1,320,000,000 Debt / Enterprise Value 32.89% Equity / Enterprise Value 67.11% Step 2: Estimate the costs of Financing Debt (after taxes) 4.80% Equity 10.76% Levered equity beta                                                1.07 Step 3: Calculate the WACC WACC 8.80% Capital Structure Weight Source of Capital (Proportion)   After-Tax Cost Weighted After-Tax Cost Debt 32.89% 4.80%                                     0.01579 Equity 67.11% 10.76%                                     0.07221 WACC 8.80%

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