Ask question

Ask question

All categories

3 years ago

12

Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist

of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 6.9%, the firm's cost of preferred stock, rp, is 6.4% and the firm's cost of equity is 10.9% for old equity, rs, and 11.51% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermediate calculations. 68.97 % What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermediate calculations.

1 answer:

iris [78.8K]3 years ago

4 0

Answer:

a. With New Stock = 8.307%

b. With Old stock = 7.971%

Explanation:

The weighted average cost of capital (WACC) defines the cost rate that blends the capital structure cost including equity, debt, and preferred stock.

Requirement A

If it uses retained earnings as its source of common equity,

Given,

The weight of the combination of the capital structure is -

$W_{d}$ = 40% = 0.40; $W_{p}$ = 5% = 0.05; $W_{e}$ = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, $R_{d}(1 - t)$ =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, $R_{p}$ = 6.4%

Cost of new Equity, $R_{e}$ = 11.51%

We know, the weighted average cost of capital (WACC) =

$W_{d}$ x $R_{d}$ + $W_{p}$ x $R_{p}$ + $W_{e}$ x $R_{e}$

= (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 11.51%)

= 1.656% + 0.32% + 6.3305%

= 8.307%

Requirement B

If it has to issue new common stock, the weighted average cost of capital (WACC) = $W_{d}$ x $R_{d}$ + $W_{p}$ x $R_{p}$ + $W_{s}$ x $R_{s}$

Given,

The weight of the combination of the capital structure is -

$W_{d}$ = 40% = 0.40; $W_{p}$ = 5% = 0.05; $W_{e}$ = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, $R_{d}(1 - t)$ =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, $R_{p}$ = 6.4%

Cost of new Equity, $R_{s}$ = 10.9%

Therefore, putting the value in the equation,

WACC = (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 10.9%)

WACC = 1.656% + 0.32% + 5.995%

WACC = 7.971%

You might be interested in

Checking for quality and paying creditors would fall within which two functional areas?

horsena [70]

Checking for quality fall within MANUFACTURING AND PRODUCTION AREA while paying creditor fall within FINANCE AND ACCOUNTING AREA.
There are many functional areas in business, each functional area is responsible for performing specific functions.

3 0

3 years ago

The inventory of Cullumber Company was destroyed by fire on March 1. From an examination of the accounting records, the followin

maria [59]

Answer:

a. Merchandise lost by fire value = $20,760

b. Merchandise lost by fire value = $25,770

Explanation:

Net sales = $51,000 - $1,100

= $49,900

Net purchase cost = $31,000 + 1,200 - $1,500

= $30,700

a. Gross profit = $49,900 × 40%

= $19,960

Cost of goods sold = $49,900 - $19,960

= $29,940

Cost of goods sold = beginning inventory + Purchases - ending inventory

= $29,940 = $20,000 + $30,700 - ending inventory

Ending inventory = $20,760

Merchandise lost by fire value = $20,760

b. Gross profit = $49,900 × 30%

= $14,970

Cost of goods sold = $49,900 - $14,970

= $34,930

Cost of goods sold = beginning inventory + Purchases - ending inventory

= $34,930 = $30,000 + $30,700 - ending inventory

ending inventory = $25,770

Merchandise lost by fire value = $25,770

5 0

2 years ago

Suppose an economy is modeled with a production possibilities frontier or curve (PPF) for butter (vertical axis) vs. guns (horiz

Nonamiya [84]

Answer: B - a general improvement in technology affecting production of all goods

Explanation: The Production Possibility Frontier is a curve that shows the two combination of goods an economy can produce when all its factors of production are efficiently used.

Technological progress shifts the curve outward, away from the origin as more output would be produced using the same combination of factor inputs.

Shifting of resources from butter to gun would lead to movements along the curve as more gun would be produced and less butter.

Pacifism becoming less popular which increases gun production, would cause movement along the curve.

Increase in consumer desire for butter increase the amount of butter produced . This would generate a movement along the curve

4 0

3 years ago

The Evendale Store is just one of many stores owned and operated by the company. The Apparel Department is one of many departmen

ExtremeBDS [4]

Answer:

<em>Direct cost for Apparel Department</em>

Apparel Department cost of sales—Evendale Store $116,100

Apparel Department sales commission—Evendale Store $7,950

Apparel Department manager’s salary—Evendale Store $9,950

<u><em>Total 134,000</em></u>

<em>Direct cost for Evendale Store</em>

Apparel Department cost of sales—Evendale Store $116,100

Store manager’s salary—Evendale Store $18,300

Apparel Department sales commission—Evendale Store $7,950

Apparel Department manager’s salary—Evendale Store $9,950

Janitorial costs—Evendale Store $13,700

<u><em>Total 166,000</em></u>

<u><em /></u>

<em>Apparel Direct cost which are also variable</em>

<em>(change as object cost increase)</em>

Apparel Department cost of sales—Evendale Store $116,100

Apparel Department sales commission—Evendale Store $7,950

<u><em>Total 124,050</em></u>

<u><em /></u>

Explanation:

a) we should consider which cost are directly linked into Apparel department only.

b) here we have to determinate cost directly linked into Evendale Store

c) While in this case, besides looking for cost linked to Apparel department, they also need to be variable thus, changing with the object cost.

5 0

3 years ago

Chapter 44 discusses the "executive" and the "independent" administrative agencies. The primary distinction between the two type

MrMuchimi

Answers:

It won't be advisable to transform this executive agencies to independent agencies, because it will reduce the power of the president, and therefore reducing the ability of the president to carry on it's agenda.

ADVANTAGE OF THE TRANSFORMATION:

1) Their will discharge their duties without any political influence.

2) The president will not longer have strong influence on their decision.

3) Each head of the agency will have a specific time and duration for it plans to be achieved before the end of it's tenure.

DISADVANTAGE OF THE TRANSACTION:

1) It will develop fight for power and control in the decisions of the agency, between the president and the head of the agency.

2) it will take away harmony been seen between the president office and the agency.

3) it will reduce the power been invested in the president in carrying on a better administration.

Executive heads owe allegiance to the president, because their are appointed by the president, and can only be removed by the president. During appointment, the president usually appoints it's loyalist that is qualified to head the agency. This is why some of their heads resign, when their can no longer cope with the will of the president.

8 0

3 years ago