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 0.7. There are 2 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, 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 $ 1.0 Bonds, coupon = 6%, paid annually (maturity = 10 years, current yield to maturity = 8%) $ 15.0 Accounts receivable 4.0 Preferred stock (par value $20 per share) 3.0 Inventories 8.0 Common stock (par value $0.10) 0.2 Plant and equipment 24.0 Additional paid-in stockholders’ equity 10.8 Retained earnings 8.0 Total $ 37.0 Total $ 37.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s WACC?

Answer 1