Question

In: Finance

a. The following balance sheet and information are given for Mancini International Corporation (MIC): Current Assets...

a. The following balance sheet and information are given for Mancini International Corporation (MIC):

Current Assets

$2,000,000

Current Liabilities

$1,000,000

Short-term Securities

       0

Long-term Liabilities

(Bonds)

$5,000,000

Long-term Assets

7,000.000

Equity

$3,000,000

Total

$9,000,000

Total

$9,000,000

Additional information: The MIC’s bond has a face value of $1,000 and pays 10 percent semiannual coupon. The bond matures in 12 years and sells at a price of $920 in the bond market. The beta of MIC is 1.25, market risk premium is 7.95 percent and risk-free rate is 2.50 percent. The MIC’s tax rate is 40%.

What is Mancini’s WACC?

b. The following information is given for Salsano Company (SACO):

  • Bond outstanding: 3,000 bonds, selling at $995 per bond.

  • Common stock outstanding: 260,000 shares, selling at $23.40 per share.
  • The before-tax cost of debt of the company is 12.31%, beta of Salsano is 1.40, market risk premium is 7.95%, tax rate 40%, and risk-free rate is 2.50%? What is Salsano’s WACC?

èRequired: Calculate WACC for each company. Please describe, in writing, how you calculate WACCs in 6 lines.

Solutions

Expert Solution

a.

Step 1 : Calculation of Cost of Capital

Cost of Bond=  (1 + i/n)^n - 1

(Note: The cost of bond will be calculated on the basis of Face Value of Bond)

i= Rate of Interest =10%

n= Compounding time in a year= 2

Cost of Bond= (1+0.10/2)^2-1

= (1.05^2)-1

= 0.1025 or say 10.25%

Cost of Equity (Ke)= Risk Free Rate+ (Beta x Risk Premium), here risk premium is Market Rate- Risk Free Rate

Ke = 2.50+ (1.25 x 7.95)

Ke = 12.44%

Step 2: Calculation of WACC

Value Cost (Before Tax) Cost after Tax Weightage WACC
Bonds 5000000 10.25% 6.15% 62.50% 3.84%
Equity 3000000 12.44% 12.44% 37.50% 4.67%
Total 8000000 8.51%

Therefore, the WACC of MAncini is 8.51%

b.

Step 1: Calculation of Cost of Capital

Cost of Bond After Tax = 12.31 (1-0.40) =7.39%

Cost of Equity = 2.50+(1.40 x 7.95) =13.63%

Step 2 : Calculation of WACC

Note: Face value of Securities not given so the calculation is done on the basis of Market Value of Securities

Value per Share/ Bond No. of Security Value of Security Weightage Cost WACC
Bonds 995.00 3000 2985000 32.91% 7.39% 2.43%
Equity 23.40 260000 6084000 67.09% 13.63% 9.14%
Total 9069000 11.58%

WACC of SACO is 11.58%

jeff jeffy answered 1 year ago
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