Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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If Sunrise continues to use the same market-value capital structure, what is the firm’s WACC assuming that
(a) it uses only
(b) if it expands so rapidly that it must issue new common stock?
Transcribed Image Text:### Condensed 2019 Balance Sheet for Sunrise Company
#### Overview (in thousands of dollars)
| Item | 2019 |
|-------------------------------|---------|
| **Current Assets** | $2,000 |
| **Net Fixed Assets** | 3,000 |
| **Total Assets** | $5,000 |
| **Accounts Payable and Accruals** | $900 |
| **Short Term Debt** | 100 |
| **Long Term Debt** | 1,100 |
| **Preferred Stock (10,000 shares)** | 250 |
| **Common Stock (50,000 shares)** | 1,300 |
| **Retained Earnings** | 1,350 |
| **Total Common Equity** | $2,650 |
| **Total Liabilities and Equity** | $5,000 |
#### Financial Analysis
- **Earnings Per Share (EPS)**: Last year’s EPS was $3.20.
- **Common Stock**:
- Current selling price: $55.00
- Last year’s dividend (D₀): $2.10
- Flotation cost to sell new stock: 10%
- Projected annual growth rate of dividends: 9%
- **Preferred Stock**:
- Dividend per share: $3.30
- Current selling price: $30.00
- **Debt Information**:
- Before-tax cost of debt: 10%
- Marginal tax rate: 25%
- Total debt: $1.2 million
- Outstanding long-term debt interest rate: 10%
- Debt sells at par value.
- **Market Conditions**:
- Market risk premium: 5%
- Risk-free rate: 6%
- Beta: 1.516
These financial details are essential for evaluating the company’s fiscal health and were provided to assist in answering specific questions in an assignment regarding Sunrise Company. Use this data to analyze the company’s performance and capital structure.
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