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Sergeeva-Olga [200]
3 years ago
9

ABC Corporation has 2.8 million shares of stock outstanding. The stock currently sells for $50 per share. The firm’s debt is pub

lically traded and was recently quoted at 95 percent of its face value. It has a total face value of $10 million, and it is currently priced to yield 12 percent. The risk-free rate is 5 percent, and the market risk premium is 7 percent. You’ve estimated that ABC has a beta of 1.25. If the corporate tax rate is 35 percent, what is the WACC of ABC Corporation?
Multiple Choice

9.38%

10.88%

11.38%

12.88%

13.38%
Business
1 answer:
Hoochie [10]3 years ago
7 0

Answer:

13.38%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of  common stock) × (cost of common stock)

where,  

Market value of equity = 2,800,000 × $50 = $140,000,000

Market value of debt = 10,000,000 × 95% = $9,500,000

Weighted of debt = Debt ÷ total firm

The total firm includes debt, preferred stock, and the equity which equals to

=  $140,000,000 + $9,500,000

= $149,500,000

So, Weighted of debt = ($9.5 million ÷ $149.50 million) = 0.0635

And, the weighted of common stock = (Common stock ÷ total firm)

                                                              = $140 million ÷ $149.50 million

                                                              = 0.9364        

And, the cost of equity = risk free rate of return + Beta × market risk premium

= 5% + 1.25 × 7%

= 5% + 8.75%

= 13.75%      

Now put these values to the above formula  

So, the value would equal to

= ( 0.0635 × 12%) × ( 1 - 35%) +  (0.9364 × 13.75%)

= 0.4953 + 12.88%

= 13.372%

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3. Prepare journal entries to record the machine’s disposal under each separate situation: (a) it is sold for $22,000 cash; (b)
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Answer and Explanation:

The Journal entries are shown below:-

1. Cash Dr, $22,000

Accumulated depreciation-machine Dr, $148,800

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                 To Machine $201,600  ($192,000 + $8,000 + $1,600)

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2. Cash Dr, $88,000

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          To Gain on Sale of Machine $35,200

          To Machine $201,600

(Being Sale of the machine is recorded)

3. Cash Dr, $32,500

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7 0
3 years ago
TH Manufacturers expects to generate cash flows of $129,600 for the next two years. At the end of the two years the business wil
arsen [322]

Answer:

Vo  = <u>C1  </u>    +        <u>C2 + V2</u>

        1 + k              (1 + K)2

Vo = <u>$129,600  </u> +   <u>$129,600 + $3,200,000</u>

        1 + 0.14            (1 + 0.14)2

Vo = $113,684.21  + $2,562,019.08

Vo = $2,675,703.29

The correct answer is C

Explanation:  

The current value of the business equals cashflow in year 1 divided by 1 + K plus the aggregate of cashflow and sales value in year 2 divided by 1 + k raised to power 2.

7 0
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Assets Current assets $38,000,000 Net plant, property, and equipment $101,000,000 Total assets $139,000,000 Liabilities and Equi
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Answer:

9.73%

Explanation:

the market value of equity = 10,000,000 stocks x $15 = $150,000,000

the market value of debt = 40,000 bonds x $1,150 = $46,000,000

total = $196,000,000

weight of equity = 0.7653

weight of debt = 0.2347

Re = 3.5% + [1.35 x (0.115 - 0.055)] = 0.035 + 0.081 = 0.116

cost of debt = ytm = {36.25 + [(1,000 - 1,150)/40]} /  [(1,000 + 1,150)/2] = (36.25 - 3.75) / 1,075 = 32.50 / 1,075 = 0.03023 x 2 = 0.0605

after tax cost of debt = 0.0605 x (1 - 40%) = 0.0363

WACC = (0.116 x 0.7653) + (0.0363 x 0.2347) = 0.09729 = 9.73%

3 0
3 years ago
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