Problem 13-7 WACC (L01) 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%. Assets Cash and short-term securities $ 2.0 Accounts receivable 3.0 Inventories 7.0 Plant and equipment 25.0 BOOK-VALUE BALANCE SHEET (Figures in $ millions) Liabilities and Net Worth Bonds, coupon – 5%, paid annually (maturity – 10 years, current yield to maturity = 78) Preferred stock (par value $20 per share)
Common stock (par value $0.10) Additional paid-in stockholders’ equity Retained earnings Total $10.0 3.0 0.2 11.8 12.0 $37.0 Total $37.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s WACC? (For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) a. Market debt-to-value ratio WACC b. Problem 13-20 Cost of Debt (L04) Micro Spinoffs Inc. issued 20-year debt a year ago at par value with a coupon rate of 5%, paid annually. Today, the debt is selling at $1,140. If the firm’s tax bracket is 21%, what is its percentage cost of debt? Assume a face value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of debt %
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