Question

Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $30 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.9. There are 1 million common shares outstanding. The market risk premium is 11%, the risk-free rate is 7%, and the firm’s tax rate is 40%.

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 = 7%)	$	5.0
Accounts receivable		3.0			Preferred stock (par value $10 per share)		3.0
Inventories		7.0			Common stock (par value $0.20)		0.2
Plant and equipment		21.0			Additional paid-in stockholders’ equity		11.8
					Retained earnings		12.0
Total	$	32.0			Total	$	32.0

a. What is the market debt-to-value ratio of the firm? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is University’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1