Use the following information:
Debt: $80,000,000 book value outstanding. The debt is trading at 95% of book value. The yield to maturity is 9%.
Equity: 3,000,000 shares selling at $47 per share. Assume the expected rate of return on Federatedâs stock is 18%.
Taxes: Federatedâs marginal tax rate is Tc = .34.
Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later its debt ratio is down to 13.75% (D/V = .1375). The interest rate has dropped to 8.6%. The companyâs business risk, opportunity cost of capital, and tax rate have not changed.
Use the three-step procedure to calculate Federatedâs WACC under these new assumptions. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Weighted-average cost of capital %
NOTE: the answer is not 16.31
Use the following information:
Debt: $80,000,000 book value outstanding. The debt is trading at 95% of book value. The yield to maturity is 9%.
Equity: 3,000,000 shares selling at $47 per share. Assume the expected rate of return on Federatedâs stock is 18%.
Taxes: Federatedâs marginal tax rate is Tc = .34.
Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later its debt ratio is down to 13.75% (D/V = .1375). The interest rate has dropped to 8.6%. The companyâs business risk, opportunity cost of capital, and tax rate have not changed.
Use the three-step procedure to calculate Federatedâs WACC under these new assumptions. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Weighted-average cost of capital %
NOTE: the answer is not 16.31
For unlimited access to Homework Help, a Homework+ subscription is required.
Related questions
Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $85, and the book value per share is $8. The most recent annual dividend, paid this morning, was $5.70 and the dividend growth rate is 4 percent. |
The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon rate of 8%, a yield to maturity of 8.50%, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon rate of 9%, a yield to maturity of 7.07%, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years. |
The tax rate is 38 percent. Calculate the companyâs WACC. |
Start by calculating the capital structure weights.
Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 decimal places, e.g., 0.1617.
Debt to Assets | % |
Equity to Assets | % |
Next, calculate the cost of equity and cost of debt to get the WACC.
Do not round intermediate calculations (i.e. use more than four decimal places when using the capital structure weights above). Enter the following answers as a percent rounded to 2 decimal places, e.g., 32.16.
Cost of Equity | % |
After-tax Cost of Debt | % |
WACC | % |
What I need is in Bold
Financial Analysis Exercise IV
Part A: Weighted Average Cost of Capital (WACC)
Here again is the formula for WACC. For simplicity the term for preferred stock has been removed:
Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled âCalculate WACC.â
Complete the following tables:
Name of Company/Stock | Walt Disney |
Ticker Symbol | DIS |
From the http://thatswacc.com/ results for your company:
WACC | 13.50% |
Cost of debt, iD | 0 |
Corporate tax rate, TC | 34.98 |
Total debt, D | 48,768,000 |
Total equity, E | 10,251,618,400 |
Total firm value, V | 10,300,386,400 |
Cost of equity, iE | 13.56% |
CAPM Components
Beta, β | 1.32 |
Historical market return, iM | Assumed 11% |
Risk-free rate, iF | Assumed 3% |
Using data in the table confirm the accuracy of the siteâs WACC calculation:
Weight of Equity | ||
Weighted Average Cost of Equity | E | |
Weight of Debt | ||
Pre-Tax Weighted Average Cost of Debt | D | |
After-Tax Weighted Cost of Debt | D · (1- TC) | |
Weighted Average Cost of Capital | = · iE + · iD · (1-Tc) |
Part B: Dividend Payout and Growth Ratios
Recall from Module 1 the following two ratios:
Internal growth rate = (ROA â RR) / [1-(ROA â RR)] (Eq. 3-30)
where RR = Retention ratio = (Addition to retained earnings)/Net income (Eq. 3-31)
The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings) to increase assets
Sustainable growth rate = (ROE â RR) / [1-(ROE â RR)] (Eq. 3-33)
If the firm uses retained earnings to support asset growth, the firmâs capital structure will change over time, i.e., the share of equity will increase relative to debt
To maintain the same capital structure managers must use both debt and equity financing to support asset growth
The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio
1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:
= (ROA â RR) / [1-(ROA â RR)] = |
2. Calculate the firmâs sustainable growth rate for the last fiscal year:
= (ROE â RR) / [1-(ROE â RR)] = |
Part C.
Consider your results for Parts A and B. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations.
If the chosen firm grows at its sustainable growth rate with increases in both its retained earnings and debt, maintaining a constant debt ratio, how will this affect its WACC?
If the chosen firm attempts to grow faster than its sustainable growth rate with modest increases in its debt ratio, how will this likely affect its WACC? What about very large increases in its debt ratio? Explain.
[1] The accessibility of this site is assumed. Should it not be accessible, please follow the instructions in the Appendix at the end of this document.