FIN419_r6_wk4_Capital Budgeting D s Template 7)xlsx Using market value and book
ID: 2824361 • Letter: F
Question
FIN419_r6_wk4_Capital Budgeting D s Template 7)xlsx Using market value and book value (separately), find the adjusted WACC, using 30% tax rate. TAX 30% Component Debt Preferred Stock Common Stock Balance Sheet Value 5,000,000.00 4.000,000.00 2,000,000.00 Market Value 6,850,000.00 2,200,000.00 5,600,000.00 Cost of Capital 8% 10% 13% Refer to the Solved Example 7 on Page 334 of your text. ANSWER Book Value Weights Market Value Weights Adjusted WACC Debt Preferred Stock Common Stock Debt Preferred Stock Common Stock Market Value Book VahueExplanation / Answer
Component
Balance Sheet Value
Market Value
Debt
50,00,000.00
68,50,000.00
Preferred Stock
40,00,000.00
22,00,000.00
Common Stock
20,00,000.00
56,00,000.00
TOTAL
1,10,00,000.00
1,46,50,000.00
Book Value Weights
Weights
Debt
[50,00,000.00 / 1,10,00,000.00]
45.45%
Preferred Stock
[40,00,000.00 / 1,10,00,000.00 ]
36.36%
Common Stock
[20,00,000.00 / 1,10,00,000.00 ]
18.19%
TOTAL
100%
Market Value Weights
Weights
Debt
[68,50,000.00 / 1,46,50,000.00 ]
46.76%
Preferred Stock
[22,00,000.00 / 1,46,50,000.00 ]
15.02%
Common Stock
[56,00,000.00 / 1,46,50,000.00 ]
38.22%
TOTAL
100%
*After Tax cost of Debt = 8% x [ 1- 0.30 ] = 5.6%
" Adjusted WACC = [ After Tax Cost of Debt x Weight of Debt ] + [ Cost of Preferred stock x Weight of preferred stock ] + [ Cost of equity x Weight of common stock ]
Adjusted WACC – Using Book Value
= [ 5.6% x 0.4545 ] + [ 10% x 0.3636 ] + [ 13% x 0.1819 ]
= 2.55% + 3.64% + 2.36%
= 8.55%
Adjusted WACC – Using Market Value
= [ 5.6% x 0.4676 ] + [ 10% x 0.1502 ] + [ 13% x 0.3822 ]
= 2.62% + 1.5% + 4.97%
= 9.09%
Component
Balance Sheet Value
Market Value
Debt
50,00,000.00
68,50,000.00
Preferred Stock
40,00,000.00
22,00,000.00
Common Stock
20,00,000.00
56,00,000.00
TOTAL
1,10,00,000.00
1,46,50,000.00
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