Part A Suppose one year ago, Mazzola Company had inventory in Britain valued at

Question

Part A Suppose one year ago, Mazzola Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What does the U.S. dollar gain or loss in inventory value because of the change in exchange rates?

Part B Borinni Inc. paid a $2.37 dividend recently, the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company’s WACC if all the equity used is from retained earnings?

Explanation / Answer

a) Current Inventory in dollar = 240,000 x 1.82 = 436,800

Initial Inventory in dollar = 240,000 x 2 = 480,000

Inventory Loss = 436,800 - 480,000 = - 43,200 dollar

b) Cost of equity, ke = D0 x (1 + g) / P + g = 2.37 x 1.055 / 52.50 + 5.5% = 10.26%

WACC = wd x kd x (1 - tax) + we x ke = 45% x 7.5% x (1 - 40%) + 55% x 10.26% = 7.67%

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