Question

Attached are the financial statements (Balance Sheet/Income Statement) for Lost Cause, Inc, Inc for the year ended December 31, 2018. Assume the following (all as of 12/31/18):

a. Beta was 1.60

b. There are 3,756,000 shares outstanding

c. There are 4,256,000 shares authorized

d. There are 500,000 shares in Treasury

e. The share price was $78.50share.

f. The overall market return was 9.0%

g. The risk-free rate of return is 2.5%

h. The amount in current maturities ($3,500) of LTD was financed in 2013 at 5.0%. Of the total listed under LTD on the balance sheet, $15,000 was financed in 2007 at 6.25%. The remainder of the LTD was financed in 2004, at 7.5% REQUIRED: Calculate the Weighted Average Cost of Capital (WACC), using BOOK EQUITY, for Lost Cause, Inc PLEASE SHOW WORK!!!!

Balance Sheet for H

Cash & Equivalents	49,325
Accounts Receivable	27,812
Inventory	1,885
Prepaid Expenses
Other Current Assets	9,278
Total Current Assets	88,300
Property, Plant & Equipment (Gross)	38,887
Accumulated Depreciation	(15,826)
Property, Plant & Equipment (Net)	23,061
Goodwill/Intangibles (net of amortization)	8,552
Other Long Term Investments	147,623
Other Long Term Assets	8,992
Total Assets	276,528
Accounts Payable	26,281
Accrued Expenses	22,456
Accured Income Taxes	7,850
Current portion of LTD	3,500
Other Current Liabilities	10,158
Total Current Liabilities	70,245
Long Term Debt	49,825
Deffered Income Tax	24,062
Other Liabilities	12,989
Total Liabilities	157,121
Common Stock	48,555
Retained Earnings	70,852
Total Stockholders Equity	119,407
Total Liabilities and Stockholders Equity	276,528

Answer 1

market value of equity	= (outstanding shares of the Company * market price of each share at this moment)
	= 3,756,000 * $78.50 =		$       29,48,46,000
market value of Debt	= Genraly equal to the book value or the balance Sheet value of debt unless specified
	$       49,825
So total Value of firm = $294,846,000 + $ 49,825   =			$       29,48,95,825
Cost of Equity (Ke)	Using the CAPM model
Risk free rate (Rf)	2.25%	Beta	1.6
Market Rate (Rm)	9%
So
Ke = Rf + Beta * (Rm-Rf)
So Ke =	2.25% + 1.6*(9%-2.5%) =		13.05%
Cost of Debt (Kd)	using average cost of debt
1. Cost of $3500 debt @ 5%		= (3500*5%) = $175
2. Cost of $15000 debt @ 6.25%		= 15000*6.25% = $937.5
3. Cost of Remaining debt @ 7.5%
Remaining debt	= LTD - $ 3500 - $ 1500 =		$             31,325.00
Cost of remaining debt = $31,325 * 7.5% =			$               2,349.38
Total cost of debt	=$2349.38 + $937.5 + $175 =		$               3,461.88
Hence % cost of debt = Total cost of debt / Total Debt (LTD)
= ($3461.88/ $49,825) *100   =		6.948%
Now Applying the formula of WACC
= (294846000/294895825)* 13.05% + (49825/294895825)* 6.948%
Hence WACC =	13.049%

Here as we do not know the tax rate, it is assumed to be zero. More over it is assumed that the balance sheet shows the figures in $ and not '000 $ .

Had the balance sheet been in '000 $, this would be the solution

market value of equity	= (outstanding shares of the Company * market price of each share at this moment)
	= 3,756,000 * $78.50 =		$       29,48,46,000
market value of Debt	= Genraly equal to the book value or the balance Sheet value of debt unless specified
	$   4,98,25,000
So total Value of firm = $294,846,000 + $ 49,825,000   =			$       34,46,71,000
Cost of Equity (Ke)	Using the CAPM model
Risk free rate (Rf)	2.25%	Beta	1.6
Market Rate (Rm)	9%
So
Ke = Rf + Beta * (Rm-Rf)
So Ke =	2.25% + 1.6*(9%-2.5%) =		13.05%
Cost of Debt (Kd)	using average cost of debt
1. Cost of $3500000 debt @ 5%		= (3500000*5%) = $175000
2. Cost of $15000000 debt @ 6.25%		= 15000000*6.25% = $937500
3. Cost of Remaining debt @ 7.5%
Remaining debt	= (LTD - $ 3500 - $ 1500)*1000 =		$    3,13,25,000.00
Cost of remaining debt = $31,325,000 * 7.5% =			$       23,49,375.00
Total cost of debt			$       34,61,875.00
Hence % cost of debt = Total cost of debt / Total Debt (LTD)
= ($3461875/ $49,825,000) *100   =		6.948%
Now Applying the formula of WACC
= (294846000/344671000)* 13.05% + (49825000/344671000)* 6.948%
Hence WACC =	12.168%