2Consider the following data for a Value of operations (V)$150 million price per

Question

2Consider the following data for a Value of operations (V)$150 million price per share [6 points). Markble securities, S15 mili ··$50 million; Shares ofcommon stock, 5 million; .mso million;h 3. A company's stock trades at S52.50 per share. It is expected to pay a dividend, D, of $2 50, and the before-tax cost ofdebt is 750% dividend is expected to grow at a constant rate of and the marginal tax rate is 40%·The target capital structure is 45% debt and 55%com Assume that retained eanings is the only source of equity financing Calculate the weighted average 5-50% per year. The mmon equity. cost of capital. L1O points 4. Consider the following information about a company: Sales revenue, $350, accounts payable, $40; total assets, $500, (net) profit margin, 5%; a rued liabilities, S30, dividend payout ratio, 6044 projected growth rate in sales, 30%. Theco pany is operating at full capacity spontaneous liabilities must increase by the projected growth rate in sales. Calculate the additional funds needed. (Do not construct any financial statements) [10 points]

Explanation / Answer

Answer 2) D 1 = $ 2.50

g = 5.50%

P 0 = $ 52.50

r d = 7.50 %

Tax Rate = 40%

Wd=45%

We = 55%

r d(1-t) = 7.50(1-0.40) = 4.50%

r e = D 1 / P o + g = 2.50 / 52.50 + 5.50 = 10.26 %

WACC = Wd r d (1-t) + we re = 0.45 x 4.50 +0.55 x 10.26 = 2.025+5.643 = 7.67 %

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