Please show all work, this is to help study for a final tomorrow! The Millenium
ID: 2765681 • Letter: P
Question
Please show all work, this is to help study for a final tomorrow!
The Millenium Company wants to purchase an asset costing $6 million. The firm has 1 million shares outstanding. Millenium’s market value capital structure, shown below, is considered to be optimal (assume that there is no short-term debt):
Long-term Debt $18,900,00
Equity $12,600,000
Total Capital $31,500,000
The firm just paid a dividend per share of $1.00. Millenium expects its earnings (and therefore its dividends) to continue to grow at their historical rate of 4 percent per year for the indefinite future. The current risk free rate is 5 percent and the expected return on the market portfolio is 16 percent. Millenium's cost of debt is 8 percent and the firm's tax rate is 40 percent. Calculate Millenium's weighted average cost of capital.
Explanation / Answer
E = Market value of the company's equity=
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate
WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
= ( 12,600,00/31,500,00 )* 0.16 +{(18,900,00/31,500,00)x 0.08 * (1-0.40)}
WACC= 0.0928 or 9.28%
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