Using the balance sheet provided for Universal Exports, determine the weighted a

Question

Using the balance sheet provided for Universal Exports, determine the weighted average cost of capital. The firm's tax rate is 40 %, the preferred stock pays a dividend of $ 0.45 per share, the beta of the stock is 1.70 , the market risk premium is 8%, and the risk-free rate is 5 %. Assume that the book value capital structure weights are the company's optimal weights.

Universal Exports Balance Sheet ($ millions)

What is the proportion of debt in the firm's capital structure,

omega Subscript wd ?

%

(Round to two decimal places.)What is the proportion of preferred stock in the firm's capital structure,

omega Subscript pp ?

%

(Round to two decimal places.)What is the proportion of common equity in the firm's capital structure,

omega Subscript ee ?

%

(Round to two decimal places.)

What is the after-tax cost of debt for Universal Exports?

%

(Round to two decimal places.)

What is the cost of preferred stock for Universal Exports?

%

(Round to two decimal places.)What is the cost of common equity for Universal Exports? Note that the problem give us the amount of the market risk premium, which is equal to

left parenthesis k Subscript Upper M minus k Subscript Upper F right parenthesiskMkF.

%

(Round to two decimal places.)

What is the WACC for Universal Exports?

%

(Round to two decimal places.)

Enter your answer in each of the answer boxes.

Asssets Liabilities & Owners Equity Cash and Short - Term Securities $2 Bonds(8% annual coupon, 10 -year maturity, 9% YTM) $10 Preferred Stock (Market price = 3$) 3 Accounts receivable 3 Common Stock 20 Inventories 7 Plant and Equipment 21 Total 33 Total 33

Explanation / Answer

proportion of debt=10/(10+3+20)=30.3%
proportion of preferred stock=3/(10+3+20)=9.09%
Proportion of common stock=20/(10+3+20)=60.61%
After tax cost of debt=9%*(1-40%)=5.4%
Cost of preferred stock=dividend/market price
=0.45/3=15%
Cost of equity=risk fre+(beta*market premium)
=5%+(1.7*8%)=18.6%
WACC=(wt of debt*cost of debt)+(wt of preferred stock*cost of preferred stock)+(wt of equity*cost of equity)_
=(30.3%*5.4%)+(9.09%*15%)+(60.61%*18.6%)
=14.27%

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.