The Widget Company Liabilities and Equity ($000’s) Currenty Liabilities Accounts
ID: 2754821 • Letter: T
Question
The Widget Company
Liabilities and Equity
($000’s)
Currenty Liabilities
Accounts payable and accurals $66,794
Short term debt 9,322
Total Current Liabilities 76,116
Long Term Debt $176,656
Total Liabilities 252,772
Preferred Stock 25,000
Common Stock 129,396
Total Stockholders Equity 154,396
Total Liabilities and Equity $407,168
The company’s beta is 0.80, the risk free rate is 3.0%, and the market rate of return is 11.5%. Last year’s dividend was $2.35, the current stock price is $88.10, and dividends have been growing at a rate of 5.5% annually. The company pays a rate of 2.25% on its short term debt and 5.75% on its long term debt. The preferred stock dividend paid by the company each year is $1,850,000. The company’s tax rate is 38%.
3. a. Using the Capital Asset Pricing Model (CAPM) calculate the expected rate of return for the stock of The Widget Company.
b. Using the Dividend Growth Model calculate the rate of return for the stock of The Widget Company.
c. What is the rate of return for the stock that you would recommend be used for the Widget Company? Why?
4. Calculate the weighted average cost of capital for the company
Explanation / Answer
3.
a. CAPM = (ke= expected rate of return)
KE= RISK FREE RATE+BETA(MARKET RETURN - RISK FREE RETURN)
= 3%+.8(11.5% - 3%)
=9.8%
b.dividend growth model =
ke = do(1+g) + g
po
, here ke= rate of return of stock, do= dividend paid, g = growth , po = current price of stock
ke = 2.35(1+.055)/ 88.10 + 0.055
=2.479/88.10 + .055
=8.31%]
4. wacc = kd * debt/CE + KP * preference capital/ CE + KE* Equity/ CE
HERE , ce means capital empoyed = equity+ Long term debt+ preference capital
= CE = 176656000+129396000+25000000 = $331052000
kd= for long term= 5.75(1-.038)= 3.565%
kp = preference dividend/ preference capital * 100= 1850000/25000000*100= 7.4%
ke = 8.31% (capm model)
WACC =3.565*176656000/331052000 + 7.4* 25000000/331052000 +8.31 *176656000/331052000
=1.9 + .558 + 4.434
=6.89%
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