Question
In: Finance
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book...
| Williams, Inc., has compiled the following information on its financing costs: |
| Type of Financing | Book Value | Market Value | Cost | |||||
| Short-term debt | $ | 15,000,000 | $ | 14,000,000 | 4.2 | % | ||
| Long-term debt | 42,500,000 | 36,500,000 | 7.3 | |||||
| Common stock | 12,000,000 | 99,000,000 | 13.1 | |||||
| Total | $ | 69,500,000 | $ | 149,500,000 | ||||
|
The company is in the 25 percent tax bracket and has a target debt-equity ratio of 70 percent. The target short-term debt/long-term debt ratio is 10 percent. |
| a. |
What is the company’s weighted average cost of capital using book value weights? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | What is the company’s weighted average cost of capital using market value weights? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | What is the company’s weighted average cost of capital using target capital structure weights? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d. |
Which is the correct WACC to use for project evaluation? |
A. Target weights
B. Book weights
C. Market weights
Solutions
Expert Solution
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jeff jeffy answered 1 year agoRelated Solutions
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book...
Williams, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
14,600,000
$
13,800,000
4.0
%
Long-term debt
39,500,000
34,700,000
7.1
Common stock
11,600,000
93,000,000
12.9
Total
$
65,700,000
$
141,500,000
The company is in the 23 percent tax bracket and has a target
debt-equity ratio of 60 percent. The target short-term
debt/long-term debt ratio is 20 percent.
a.
What is the company’s weighted average cost...
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book...
Williams, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
15,800,000
$
14,400,000
4.6
%
Long-term debt
48,500,000
40,100,000
7.7
Common stock
12,800,000
111,000,000
13.5
Total
$
77,100,000
$
165,500,000
The company is in the 24 percent tax bracket and has a target
debt-equity ratio of 70 percent. The target short-term
debt/long-term debt ratio is 10 percent.
a.
What is the company’s weighted average cost...
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book...
Williams, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
12,400,000
$
12,700,000
2.9
%
Long-term debt
23,000,000
24,800,000
6.0
Common stock
9,400,000
60,000,000
11.8
Total
$
44,800,000
$
97,500,000
The company is in the 22 percent tax bracket and has a target
debt-equity ratio of 65 percent. The target short-term
debt/long-term debt ratio is 15 percent.
a.
What is the company’s weighted average cost...
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book...
Williams, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
15,200,000
$
14,100,000
4.3
%
Long-term debt
44,000,000
37,400,000
7.4
Common stock
12,200,000
102,000,000
13.2
Total
$
71,400,000
$
153,500,000
The company is in the 21 percent tax bracket and has a target
debt-equity ratio of 75 percent. The target short-term
debt/long-term debt ratio is 15 percent.
a.
What is the company’s weighted average cost...
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book...
Williams, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
12,400,000
$
12,700,000
2.9
%
Long-term debt
23,000,000
24,800,000
6.0
Common stock
9,400,000
60,000,000
11.8
Total
$
44,800,000
$
97,500,000
The company is in the 22 percent tax bracket and has a target
debt-equity ratio of 65 percent. The target short-term
debt/long-term debt ratio is 15 percent.
a.
What is the company’s weighted average cost...
Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book Value...
Williams, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
13,800,000
$
13,400,000
3.6
%
Long-term debt
33,500,000
31,100,000
6.7
Common stock
10,800,000
81,000,000
12.5
Total
$
58,100,000
$
125,500,000
The company is in the 24 percent tax bracket and has a target
debt-equity ratio of 60 percent. The target short-term
debt/long-term debt ratio is 15 percent.
a.
What is the company’s weighted average cost of capital...
Bolero, Inc., has compiled the following information on its financing costs: Type of Financing Book...
Bolero, Inc., has compiled the following information on its
financing costs:
Type of Financing
Book Value
Market Value
Cost
Short-term debt
$
11,200,000
$
12,200,000
5.3
%
Long-term debt
4,200,000
4,200,000
8.4
Common stock
7,200,000
27,200,000
15.0
Total
$
22,600,000
$
43,600,000
The company is in the 40 percent tax bracket and has a target
debt–equity ratio of 60 percent. The target short-term
debt/long-term debt ratio is 15 percent.
a.
What is the company’s weighted average cost...
Bolero, Inc., has compiled the following information on its financing costs: Type of Financing Book Value...
Bolero, Inc., has compiled the following information on its
financing costs: Type of Financing Book Value Market Value Cost
Short-term debt $ 10,200,000 $ 11,200,000 4.3 % Long-term debt
3,200,000 3,200,000 7.4 Common stock 6,200,000 26,200,000 14.0
Total $ 19,600,000 $ 40,600,000 The company is in the 35 percent
tax bracket and has a target debt–equity ratio of 65 percent. The
target short-term debt/long-term debt ratio is 15 percent. a. What
is the company’s weighted average cost of capital using...
Webster Company has compiled the information shown in the following table. Sources of capital Book Value...
Webster Company has compiled the information shown in the
following table.
Sources of capital
Book Value
Market
Cost of
Floatation Cost
Value
Capital
Long-term
debt
4,000,000.00
3,840,000.00
0.10
0%
Preferred
stock
40,000.00
60,000.00
0.13
2%
Common
stock equity
1,060,000.00
3,000,000.00
0.17
5%
Required:
Calculate the weighted-average cost of capital of the company
when the company pays 40% income tax.
Describe the relationship between optimal capital structure and
cost of capital. Don’t...
WACC Book weights and market weights Webster Company has compiled the information shown in the following...
WACC Book weights and market weights Webster Company has
compiled the information shown in the following table:
source of capital. Book value Market value After-tax cost
Long-term debt $4,000,000 $3,840,000 6%
Preferred stock 40,000 60,000 13%
Common stock equity 1,060,000 3,000,000 17%
Totals $5,100,000. $6,900,000
.Calculate the weighted average cost of capital using book value
weights
.b. Calculate the weighted average cost of capital using market
value weights
.c. Compare the answers obtained in parts a and b Explain the...
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