You are expected Sales to increase next year by 10% off of a base of $7,000 this
ID: 2731175 • Letter: Y
Question
You are expected Sales to increase next year by 10% off of a base of $7,000 this year. Net Income this past year was $600. Assets were 11,000 this year, and the Sales/Assets ratio will remain constant next year. Debt this past year was at 3,500, and the Debt/Equity ratio will remain constant for the next year. No debt will be retired and no stock will be retired. No Dividends will be given out.
1. What will Sales be next year?
2. What will Net Income be next year?
3. What will Assets be next year?
4. How much new debt will be issued next year?
5. How much new stock will be issued next year?
6. Risk free rate is 2%. Equity Risk Premium is 6%. Beta is 1.5. What is the equity cost of capital?
7. Debt/Equity is 0.45 Risk free rate is 3% Beta is 2.0 Equity Risk Premium is 7% Cost of debt before tax adjustment is 5.5% corporate tax rate is 40% What is the Weighted Average Cost of Capital (WACC)?
8. Debt/Equity is 2.75 Risk free rate is 3.5% Beta is 4.25 Equity Risk Premium is 6.5% Cost of debt before tax adjustment is 6% corporate tax rate is 35% What is the Weighted Average Cost of Capital (WACC)?
9. Debt/Equity is 2.0 Risk free rate is 3.75% Beta is 3.0 Equity Risk Premium is 6% Cost of debt before tax adjustment is 7% corporate tax rate is 40% What is the Weighted Average Cost of Capital (WACC)?
10. Debt/Equity is 0.25 Risk free rate is 3.75% Beta is 3.0 Equity Risk Premium is 7% Cost of debt before tax adjustment is 8% corporate tax rate is 38% What is the Weighted Average Cost of Capital (WACC)?
Explanation / Answer
1. Sales next year = 7000 x 1.10 = $7700
2. Net income next year = 600 x 1.10 = $660
3. Assets next year = 11000 x 1.10 = $12100
4. Debt to be issued = Increase in assets - Increase in Sales - Increase in net income
= 1100 - 700 - 60
= $340
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