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viva [34]
2 years ago
13

LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 perce

nt coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162. It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at the same cost of its current bonds but will incur flotation costs of $50 per bond (Hint: the coupon rate on the new bonds = the YTM on existing bonds). The firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,000 shares of preferred stock outstanding. Rollins' beta is 0.94, the risk-free rate is 3.72 percent, and the market risk premium is 6 percent. The common stock currently sells for $100 a share and there are 5,000,000 shares outstanding. The firm's marginal tax rate is 40 percent.
Required:
What is the WACC?
Business
1 answer:
11111nata11111 [884]2 years ago
3 0

Answer:

9.72%

Explanation:

Maturity = 34

Par-value = -1000

Coupon rate = 6%

Coupon PMT = -60

Value of bond = 1152

Semi-annual Yield = Rate(34, -60, 1162, -1000, 0, 0)

Semi-annual Yield = 5.00%

Annual Yield = 10%

Tax rate = 40%

After tax cost of debt = 10*(1-0.4)= 6%: Add: Flotation cost (5%) = 11%

Cost of preferred stock = Dividend/Price = 12/120 = 10%

Cost of equity = Risk free rate + Beta*Market risk premium

Cost of equity = 3.72 + 0.94*6

Cost of equity = 9.36%

Particulars  Value per    No of        Market   Weight  Cost of     Product

                    security    securities     value                    security

Bonds             1162       100000     116200000   0.15784   11          1.736213

P. stock           120        1000000  120000000  0.16299   10         1.62999

Equity              100        5000000 <u>500000000</u> <u>0.6792</u>   9.36       <u>6.35697</u>

                                                       736200000     1                         <u>9.72317</u>

So, the WACC of the firm is 9.72%

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Answer:

Account Analysis

Explanation:

The estimation of different costs associated with the product is know account analysis. In this method the cost is measured into three categories as below

  1. Variable cost
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All these costs are calculated using linear algebra as below

Y= B + MX

where

Y is the total costs of product

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3 years ago
Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only on
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Answer and Explanation:

1. The total amount of traceable fixed manufacturing overhead is given below:-

                                                 Alpha            Beta

Number of units produced   100,000       100,000

Traceable fixed

manufacturing overhead      $16                 $18

Total amount of traceable fixed

manufacturing overhead $1,600,000  $1,800,000

2. The total amount of common fixed expenses is given below:-

                                                 Alpha            Beta

Number of units produced   100,000       100,000

Common fixed

manufacturing overhead       $15                 $10

Total amount of common fixed

manufacturing overhead     $1,500,000  $1,000,000

3. The computation of increase or decrease of profit is shown below:-

Selling price                        $80

Less: Variable cost

Direct material                   ($30)

Direct labor                        ($20)

Variable manufacturing

overhead                             ($7)

Contribution margin           $23

Less: Variable selling

expenses                            ($12)

Profit per unit                       $11

Total profit increase

(10,000 × $11)                      $110,000

The computation of increase or decrease of profit is as shown below:-

Selling price                        $39

Less: Variable cost

Direct material                   ($12)

Direct labor                        ($15)

Variable manufacturing

overhead                             ($5)

Contribution margin           $7

Less: Variable selling

expenses                            ($8)

Profit per unit                       ($1)

Total profit decrease

(5,000 × -$1)                      -($5,000)

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3 years ago
Suppose that actual inflation is 3 percent, the Fed's inflation target is 2 percentage points, and unemployment rate is 3 percen
Dahasolnce [82]

The government would set its targeted interest at 6.5%

Based on the Taylor's rule

R = π + A + 0.5(A-A*) + 0.5

This is the formula that helps to get the output gap

<u>Definition of terms</u>

R is the nominal federal funds rate

π is the real rate of federal funds = 2%

A is the rate of inflation

A* is the target of of inflation = 2%

Rate of unemployment = 3%

The government has a target of full employment that is at 4 percent.

When we enter the values into the formula

R = 2% + 3% + 0.5(3%-2%) + 0.5%(2%)

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= 6.5%

Therefore the government would set its targeted interest at 6.5%

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Answer: Sharing information across the organisation

   

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The correct answer is D.

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3 years ago
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