a. The following balance sheet and information are given for Carboni Company(CC)
ID: 2797235 • Letter: A
Question
a. The following balance sheet and information are given for Carboni Company(CC):
Current Assets
$2,000,000
Current Liabilities
$1,000,000
Short-term Securities
0
Long-term Liabilities
(Bonds)
$5,000,000
Long-term Assets
7,000.000
Equity
$3,000,000
Total
$9,000,000
Total
$9,000,000
Additional information: The CC’s bond has a face value of $1,000 and pays 10 percent semiannual coupon. The bond matures in 12 years and sells at a price of $920 in the bond market. The beta of CC is 1.25, market risk premium is 7.95 percent and risk free rate is 2.50 percent. The CC’s tax rate is 40%.
What is Carboni’s WACC?
b. The following information is given for Guatelli Company(GC):
Bond outstanding: 3,000 bonds, selling at $995 per bond.
Common stock outstanding: 260,000 shares, selling at $23.40 per share.
The before-tax cost of debt of the company is 12.31%, beta of Guatelli is 1.40, market risk premium is 7.95%, tax rate 40%, and risk free rate is 2.50%? What is Guatelli’s WACC?
èRequired: Calculate WACC for both companies. Please describe, in writing, how you calculate WACCs in 6 lines.
Current Assets
$2,000,000
Current Liabilities
$1,000,000
Short-term Securities
0
Long-term Liabilities
(Bonds)
$5,000,000
Long-term Assets
7,000.000
Equity
$3,000,000
Total
$9,000,000
Total
$9,000,000
Explanation / Answer
Cost of equity = Risk free+beta*market risk premium
=2.5%+(1.25*7.95%)
=12.44%
cost of debt can be found using rate formale in excel
=rate(nper,pmt,pv,fv,type)
=rate(24,(1000*5%),-920,1000,0,0)
=5.61%
annual=5.61%*2=11.23%
after tax cost of debt=11.23%*(1-40%)=6.74%
Wt of debt=5000000/(5000000+3000000)
=62.5%
Wt of equity=1-wt of debt
=1-62.5%=37.5%
WACC=(wt of debt*cost of debt)+(wt of equity*cost of equity)
WACC=(62.50%*6.74%)+(37.50%*12.44%)
=8.88%
b)after tax cost of debt=12.31%*(1-40%)=7.39%
Cost of equity = Risk free+beta*market risk premium
=2.5%+(1.4*7.95%)
=13.63%
Debt=3000*995=2985000
Equity=260000*23.4=6084000
Wt of debt= debt/(debt+equity)
=2985000/(2985000+6084000)
=32.91%
Wt of equity=1-wt of dent
=1-32.91%=67.09%
WACC=(wt of debt*cost of debt)+(wt of equity*cost of equity)
WACC=(32.91%*7.39%)+(67.09%*13.63%)
=11.58%
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