Question

Anson Jackson Court Company (AJC) The Anson Jackson Court (AJC) currently has $150,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $89,000, and it is a zero growth company. AJC's current cost of equity is 10%, and its tax rate is 25%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Refer to the data for the Anson Jackson Court Company (AJC). What is AJC's current total market value and weighted average cost of capital? Total Market Value; WACC

a. $750,000; 8.4%

b. $650,000; 9.4%

c. $650,000; 8.9%

d. $750,000; 8.9%

e. $750,000; 9.4%

Answer 1

A. Current Total Market Value
Current market value of debt		$1,50,000.00
Current market value of equity		$6,00,000.00
( no.of shares * market price )
10,000 Shares*$60
Market Value		$7,50,000
B. Weighted Average Cost of Capital (WACC)
Dollar Valuation Method
Equity	$6,00,000.00
Debt	$1,50,000.00
Cost of Equity	10%
Cost of Debt	6%
Tax rate	25%
WACC =	{Equity / (Equity + Debt) * Cost of Equity } +{ Debt / ( Equity + Debt ) * Cost of Debt * (1 - 25%)}
=	{$6,00,000/($6,00,000+$1,50,000)*10%} + {$1,50,000/($6,00,000+$1,50,000)*6%*0.75}
=	$6,00,000	*10%        +	$1,50,000	*6%*0.75
	$7,50,000		$7,50,000
=	0.08 + 0.009
=	8.90%
	Option D : $7,50,000 ; 8.90%