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Sphinxa [80]
3 years ago
7

Debt: 5,000 7.2 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 108 percent of par; the bo

nds make semiannual payments. Common stock: 440,000 shares outstanding, selling for $62 per share; the beta is 1.05. Market: 11 percent market risk premium and 5.2 percent risk-free rate. What is the company's WACC?
Business
1 answer:
Tatiana [17]3 years ago
7 0

Answer:

the company's WACC is 15.07 %.

Explanation:

WACC = ke × (E/V) + kd × (D/V)

kd = cost of debt

Pv = $1,000 × 108% = - $1,080

n = 30 × 2 = 60

pmt = ($1,000 × 7.2 %) ÷ 2 = $36

p/yr = 2

Fv = $1,000

r = ?

Using a Financial Calculator, the Pre-tax cost of debt, r is 6.5852 or 6.59 %

After tax cost of debt = Interest × (1 - tax rate)

<em>I will use the pre-tax  cost of debt for now since i do not have the tax rate on this question.</em>

ke = cost of equity

    = Return on Risk free security + Beta × Market Risk Premium

    = 5.20 % + 1.05 × 11.00 %

    = 16.75 %

E/V = Market Weight of Equity

      = (440,000 × $62) / (440,000 × $62 + 5,000 × $1,080) × 100

      = 83.48 %

D/V = Market Weight of Debt

      = (5,000 × $1,080) / (440,000 × $62 + 5,000 × $1,080) × 100

      = 16.52 %

WACC = 16.75 % × 83.48 % + 6.59 % × 16.52 %

           = 15.07 %

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3 years ago
Prestwich Corporation has two service departments and two operating departments. Costs of the Building and Grounds service depar
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Answer:

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There is a total of 50000 square feet and Operating Department A occupies 60%(30000/50000 of that.

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7 0
3 years ago
Determine the type of credit that involves a set limit based on what a consumer pays up front.
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4 0
2 years ago
Mark Crane purchased a $1,000 corporate bond five years ago for $1,055. The bond paid 7.0 percent annual interest. Five years la
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Answer:

Mr Crane's total return on the bond investment was 5.35%

Explanation:

The return on a bond is also known as it yield to maturity (YTM). In order to find a bonds YTM we need to know its present value, future value, coupon payments and number of years. In this case the bond's present value is 1,055 because it was bought at this price, it's future value is 980 because it was sold for 980, its number of years was 5 as it was held for 5 years and its coupon payment was  (0.07*1000)=70. Now in order to compute return or ytm we need to put all these values in a financial calculator and compute I

PV= -1055

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6 0
3 years ago
Northwood Company manufactures basketballs. The company has a ball that sells for S25. At present, the ball is manufactured in a
Maksim231197 [3]

Answer:

1A. Compute the CM ratio and the break-even point in balls.

  • CM ratio = 2.5
  • break even point = 21,000 balls

1B. Compute the degree of operating leverage at last year.

  • 31.82%

2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in balls?

  • CM ratio = 3.57
  • break even point = 30,000 balls

3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $90,000, last year?

  • 42,858 balls

4. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs?

  • new price of $28 per ball

5. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls?

  • CM = 1.32
  • 26,250 balls

6.a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year?

  • 31,875 balls

6.b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Income Statement

Total revenue $750,000

Variable expenses <u>($270,000) </u>

Contribution margin $480,000

Fixed expenses <u>($420,000 )</u>

Net operating income $60,000

Degree of operating leverage = 60.87%

6.c. If you were a member of top management, would you have been in favor of constructing the new plant?

  • If you cannot avoid paying the salary raise, then the company needs to carry on the new plant project.

Explanation:

sales price per ball = $25

variable expenses: $15 per unit

  • direct labor $9
  • other variable costs $6

CM ratio = net sales / CM = $750,000 / $300,000 = 2.5

break even point = total fixed costs / CM per unit = $210,000 / $10 = 21,000 balls

degree of operating leverage = fixed costs / total costs = $210,000 / $660,000 = 31.82%

new CM ratio = net sales / CM = $750,000 / $210,000 = 3.57

break even point = total fixed costs / CM per unit = $210,000 / $7 = 30,000 balls

sales level for $90,000 profit = ($210,000 + $90,000) / $7 = 42,857.14 ≈ 42,858 balls

CM ratio (new plant) = net sales / CM = $750,000 / $570,000 = 1.32

break even point = total fixed costs / CM per unit = $420,000 / $16 = 26,250 balls

sales level for $90,000 profit = ($420,000 + $90,000) / $16 = 31,875 balls

8 0
3 years ago
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