Exhibit 1 Flight plan Consulting, Inc. (B) Balance Sheet December 31,2001 ($000’

Question

Exhibit 1

Flight plan Consulting, Inc. (B)

Balance Sheet

December 31,2001

($000’s)

Current Assets    $1,500                               Current Liabilities $400

Fixed Assets        1,500                                 Long-Term Debt 600

                                                                      Common Stock 400

                                                                       ($1 par)

                                                                     Retained Earnings 1,600

Total Assets       $3,000                               Total                     $3,000

Exhibit 2

Flight Plan Consulting, Inc.

Selected Capital Market, Company, Industry Data

FPC, Inc. may issue long-term debt at par, with a coupon rate of 5 percent; its existing $1,000 par bonds carried a coupon rate of 7% (see FPC, Inc. A).

The firm’s stock price had risen to $21.50 in recent weeks, and the increase in the firm’s net income after-tax is 16%.

A broad market average of common stocks had risen at an annualized rate of 15 percent in recent weeks. The return on that average is now 16%. (The yield on 10-year U.S.Government bonds is 5.01%. The stock of FPC, Inc. was 10 percent more volatile that the market average of stocks.) Flight Plan Consulting falls into the 30% (combined) tax bracket.

Many specialized consulting firms, if they experienced substantial net income growth, have a long-term debt to total asset ratio of approximately 40 percent on average.

Calculate the Marginal weighted average cost of capital (WACC) for FPC, INC.

Explanation / Answer

Debt Value = D = Long-Term Debt = $ 600 and Equity Value = E = Common Stock + Retained Earnings = 400 + 1600 = $ 2000

New debt can be issued at par , thereby implying a pre-tax cost of debt of 5 % for new debt.

Cost of Debt = kd = 5 %

Market Return = 16 %, RIsk Free Rate = 5.01 % and Stock is 10 % more volatile than the market average stocks thereby implying a beta of 1.1

Cost of Equity = ke = 5.01 + 1.1 x (16 - 5.01) = 17.099 %

Firm Value = 600 + 2000 = V = $ 2600

Target Debt to Asset Ratio = 0.4

Tax Rate = t = 30 %

Marginal WACC = 5 x (1-0.3) x (0.4) + 17.099 x (0.6) = 11.66 % approximately.

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