Question

In: Finance

The Clarion Pop Corporation has the following items on their income and balance sheets (values in...

The Clarion Pop Corporation has the following items on their income and balance sheets (values in tables are in thousands:

Balance Sheet Items
(Assets)

Last Year Two Years Ago
Cash 440 460
Accounts Receivable 500 510
Inventory 283 286
Total Current Assets
Fixed Assets 5300 4920
Depreciation 2325 2061
Net Fixed Assets

Balance Sheet Items
(Liabilities)

Accounts Payable 540 500
Notes Payable 81 99
Total Current Liabilities
Long Term Liabilities 1080 960
Total Liabilities
Preferred Stock 1135 1135
Common Stock 3330 3330
Retained Earnings 1380 1000
Total Liabilities and Equity

Income Statement Items

Past Year Two Years Ago
Sales 3160 2800
Cost of Goods Sold 1800 1610
Operating Expenses   575 545
Interest (Paid L/T Debt) 59 90
Taxes Paid 86 77
Preferred Stock Dividends Paid 76 22

What is the Weighted average cost of capital for last year for Clarion Pop if the rate on the common stock is 10.00%?

Express your answer as .xxxx.

(Hint: First Calculate the Percentages of Common Stock, Preferred Stock, and Long-Term Debt. Do not include Retained Earnings. Net compute the rate [percentage cost] for Long-Term Debt and Preferred Stock. Then compute the weighted average.)

Solutions

Expert Solution

Step 1: Calculate Percentages (Weights) of Common Stock, Preferred Stock and Long Term Debt

The percentages of common stock, preferred stock and long term debt are calculated as below:

Total Value = Value of Common Stock + Value of Preferred Stock + Value of Long Term Debt = 1,080 + 1,135 + 3,330 = $5,545

Common Stock Percentage = Value of Common Stock/Total Value*100 = 3,330/5,545*100 = 60.05%

Preferred Stock Percentage = Value of Preferred Stock/Total Value*100 = 1,135/5,545*100 = 20.47%

Long Term Debt Percentage = Value of Long Term Debt/Total Value*100 = 1,080/5,545*100 = 19.48%

_____

Step 2: Calculate Percentage Cost of Long Term Debt and Preferred Stock

The value of percentage cost of debt and preferred stock is arrived as below:

Percentage Cost of Long Term Debt = Interest Paid/Value of Long Term Debt*100 = 59/1,080*100 = 5.46%

Percentage Cost of Preferred Stock = Preferred Dividends Paid/Value of Preferred Stock*100 = 76/1,135*100 = 6.70%

_____

Step 3: Calculate Weighted Average Cost of Capital

The weighted average cost of capital is determined as below:

Weighted Average Cost of Capital = Long-Term Debt Percentage*Percentage Cost of Debt + Preferred Stock Percentage*Percentage Cost of Preferred Cost + Common Stock Percentage*Percentage Cost of Common Stock = 19.48%*5.46% + 20.47%*6.70% + 60.05%*10% = 8.44% (answer)

jeff jeffy answered 2 years ago
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