Curry Construction\'s CFO has collected the follows market value information. Sh

Question

Curry Construction's CFO has collected the follows market value information. She has assigned you the task of calculating their WACCs. The cost of common equity is 16%. They have 25 million share with a book value of $11.87, and a current market price of $27.37. The cost of preferred stock is 11%. They have 150,000 shares of preferred stock outstanding with a book value of $100 per share and a current market price ot $105.00 per share. The company currently has $10,000,000 of 20-year bonds outstanding. The bonds have a 9 percent annual coupon, a face value of $1,000, and they currently sell for $950 The company's tax rate is 40 percent. a. What is Curry's Book value Weighted Average Cost of Capital? b. What is Curry's Market value Weight Average Cost of Capital? What is the primary reason a company goes bankrupt?

Explanation / Answer

Curry Construction All Amounts in $ a. Book Value Weighted Average Cost of Capital Particulars of Capital No. Price Total Cost of Post Tax Adjusted per Value capital Cost of Capital Value share/bond Common Equity 2500000 11.87 29675000 16% 16% 4748000 Preferred Stock 150000 100 15000000 11% 11% 1650000 20-Year Bonds 10000 1000 10000000 9% 5.400% 540000 Total 54675000 6938000 Weighted Average Cost of Capital 12.69% b. Market Value Weighted Average Cost of Capital Particulars of Capital No. Price Total Cost of Post Tax Adjusted per Value capital Cost of Capital Value share/bond Common Equity 2500000 27.37 68425000 16% 16% 10948000 Preferred Stock 150000 105 15750000 11% 11% 1732500 20-Year Bonds 10000 950 9500000 9% 5.400% 513000 Total 93675000 13193500 Weighted Average Cost of Capital 14.08% c. The primary reason a company goes bankrupt is when it has no sufficient funds in the form of common stock in order to repay off its debts and preferred stock holders. The liquidity position of the Company is weak, and it cannot fulfill both its current and long-term liabilities, is when the Company tends to become bankrupt.

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