You purchased 1,000 shares of stock in Natural Chicken Wings, Inc., at a price of $43.37 per share. Since you purchased the stoc
1 answer:
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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 -
= 40% = 0.40;
= 5% = 0.05;
= 55% = 0.55
For cost of debt, we have to find cost of debt after tax, =
6.9% x (1 - 0.40) = 4.14%
Cost of preferred stock, = 6.4%
Cost of new Equity, = 11.51%
We know, the weighted average cost of capital (WACC) =
x
+
x
+
x
= (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) = x
+
x
+
x
Given,
The weight of the combination of the capital structure is -
= 40% = 0.40;
= 5% = 0.05;
= 55% = 0.55
For cost of debt, we have to find cost of debt after tax, =
6.9% x (1 - 0.40) = 4.14%
Cost of preferred stock, = 6.4%
Cost of new Equity, = 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%
Answer:
The Accounting Equation states that;
Assets = Liabilities + Equity
Equity as at 2016 = Assets - Liabilities
= 50 - 13
= $37 million
Equity as at 2017 = Assets - Liabilities
= 77 - 18
= $59 million
1. Timmy issued $13 million of stock and declared no dividends.
<em>The Net Income ( loss) will be the figure that gives the Statement of Equity a figure of $59 million.</em>
Net Income = Total stockholders' equity, January 31, 2017 - Total stockholders' equity, January 31, 2016 - Issuance of stock
= 59 - 37 - 13
= $9 million
Total stockholders' equity, January 31, 2016 ................ 37
Add: Issuance of stock ......................................................... 13
Net income ......................................................................9
Less: Dividends declared......................................................0
Net loss.......................................................................................0
Total stockholders' equity, January 31, 2017...................59
2. Timmy issued no stock but declared dividends of $17 million.
Net Income (loss) = Total stockholders' equity, January 31, 2017 - Total stockholders' equity, January 31, 2016 + Dividends Declared
= 59 - 37 + 17
= $39 million
Total stockholders' equity, January 31, 2016 ................ 37
Add: Issuance of stock ......................................................... 0
Net income ......................................................................39
Less: Dividends declared......................................................(17)
Net loss.......................................................................................0
Total stockholders' equity, January 31, 2017...................59
3. Timmy issued $20 million of stock and declared dividends of $27 million.
Net Income (loss) = Total stockholders' equity, January 31, 2017 - Total stockholders' equity, January 31, 2016 + Dividends Declared - Issuance of stock
= 59 - 37 + 27 - 20
= $29 million
Total stockholders' equity, January 31, 2016 ................ 37
Add: Issuance of stock ......................................................... 20
Net income ......................................................................29
Less: Dividends declared......................................................(27)
Net loss.......................................................................................0
Total stockholders' equity, January 31, 2017...................59
