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 $16 per share and has a beta of 0.7. There are 1 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm’s tax rate is 21%.   BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets         Liabilities and Net Worth       Cash and short-term securities $ 2.0     Bonds, coupon = 6%, paid annually (maturity = 10 years, current yield to maturity = 7%) $ 10.0   Accounts receivable   5.0     Preferred stock (par value $10 per share)   3.0   Inventories   9.0     Common stock (par value $0.10)   0.1   Plant and equipment   22.0     Additional paid-in stockholders’ equity   8.9              Retained earnings   16.0   Total $ 38.0     Total $ 38.0       a. What is the market debt-to-value ratio of the firm? b. What is University’s WACC?

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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 $16 per share and has a beta of 0.7. There are 1 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm’s tax rate is 21%.

 

BOOK-VALUE BALANCE SHEET
(Figures in $ millions)
Assets         Liabilities and Net Worth      
Cash and short-term securities $ 2.0     Bonds, coupon = 6%, paid annually
(maturity = 10 years, current yield to maturity = 7%)
$ 10.0  
Accounts receivable   5.0     Preferred stock (par value $10 per share)   3.0  
Inventories   9.0     Common stock (par value $0.10)   0.1  
Plant and equipment   22.0     Additional paid-in stockholders’ equity   8.9  
           Retained earnings   16.0  
Total $ 38.0     Total $ 38.0  
 

 

a. What is the market debt-to-value ratio of the firm?

b. What is University’s WACC?

 

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