ACC and Crib- Tick, Inc., makers of baby furniture, are traded publicly on the N

Question

ACC and Crib- Tick, Inc., makers of baby furniture, are traded publicly on the NYSE. Currently, the anding. Crib-icks latest earnings were $2.09 per share, and next years expected to let value of Crib-Tick common stock is $14 per share, and there are 4 million shares term bonds of dividendis be $1.02 per share. Five years ago, Crib-Tick paid a dividend of $0.72 per Crib-Tick has long-term bonds with a total market value of $30 million. The bonds share. ture in 11 years and have an 8% coupon. They are currently selling for $880. (Assume bonds have 22 more coupon payments until maturity.) In addition to long-ter bonds, Crib-Tick has mil ties Current market conditions are , $5 million in notes payable and 10 million in other current liabili- 13.75%. Crib lick has a beta of 1 1, andipays corporate taxes at a rate of 30%. Estimate Crib-Tick's WACC. = 6% and rM

Explanation / Answer

Price of share 14 Next years dividend 1.02 5 years ago dividend 0.72 Dividend growth 7.21% Re 14.50% Cost of equity as per CAPM Re 6% + 1.1*(13.75%-6%) 14.53% So average estimate of cost of equity 14.51% Equity 56 million Bond yield Value 30 million Periods 22 Coupon 8% Price 880 Yield 10.05% Tax 30% WACC ((14.51%*56)+(10.05%*(1-30%)*30))/(56+30) WACC 11.90%

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