Question

Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.8. There are 2 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm’s tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 3.0 Bonds, coupon = 5%, paid annually (maturity = 10 years, current yield to maturity = 7%) $ 20.0 Accounts receivable 6.0 Preferred stock (par value $15 per share) 3.0 Inventories 10.0 Common stock (par value $0.20) 0.4 Plant and equipment 23.0 Additional paid-in stockholders’ equity 11.6 Retained earnings 7.0 Total $ 42.0 Total $ 42.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s WACC? (For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

GIVEN TAHT :-

according to the question we have that the following data,

the preferred stock currently sells for $15 per share and pays a dividend of $3 a share.

The common stock sells for $20 per share and has a beta of 0.8.

Net Worth Cash and short-term securities $ 3.0

coupon = 5%

current yield to maturity = 7%

maturity = 10 years,

market value of debet = 17.1906

market value of equity =40

market value of preferred stock =3

therefore ,

sum of the market values = 60.1906

TO FIND :-a).What is the market debt-to-value ratio of the firm?

at first finding the cost of equity  

Ke= Rf +beta (Rm -Rf)

we have the values of

{Rf=4%;beta =0.8; Rm-Rf =8%

substituting the values we get that

=> 4%+0.8*(8%)

Ke = 0.032

Kp=dividend / price

= 3.00/15.00 ( dividend =3.00

price=15.00)

Kp= 2.00%

finding the cost of debt after tax

so for finding the cost of debt after tax =YMT(1-t)

so substituting all the values from the above we get that the value of Kd

there fore,

Kd = 5.53%

TO FIND :-b)b. What is University’s WACC?

for some particualrs , makret value(A) weights(B) ,coc(C) weighted cost(B*C)

for debt

=>A= 17.1906

B= 0.285602

C= 5.53%

B*C =0.0579381

For preferred stock

=> A=3

B= 0.049842

C= 20.00%

B*C= 0.009968339

for common stock

=> A= 40

B= 0.664556

C= 10.40%

B*C= 0.069113819

So now

the sumof the marekt values of all particulars = 17.1906+3+40=60.1906

the sum of the weights of all particualres = 0.285602+0.049842+0.664556= 1

now from all the avlues of the above we get that

the value of WACC= 9.49%

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