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f Sunrise continues to use the same market-value capital structure, what is the firm’s WACC assuming that (a) it uses only retained earnings for equity (for cost of equity use the average of your calculated costs via DCF and CAPM) (b) if it expands so rapidly that it must issue new common stock?

f Sunrise continues to use the same market-value capital structure, what is the firm’s WACC assuming that (a) it uses only retained earnings for equity (for cost of equity use the average of your calculated costs via DCF and CAPM) (b) if it expands so rapidly that it must issue new common stock?

Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter4: The Balance Sheet And The Statement Of Shareholders' Equity
Section: Chapter Questions
Problem 9E
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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 retained earnings for equity (for cost of equity use the average of your calculated costs via DCF and CAPM)

(b) if it expands so rapidly that it must issue new common stock?

Here is the condensed 2019 balance sheet for Sunrise Company (in thousands of dollars): Condensed 2019 Balance Sheet 2019 Current assets $2,000 Net Fixed assets 3,000 Total assets $5,000 Accounts payable and accurals $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 Sunrise's earnings per share last year were $3.20. The common stock sells for $55.00, last year's dividend (Do)was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrise's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Sunrise's beta is 1.516. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment.
Transcribed Image Text:Here is the condensed 2019 balance sheet for Sunrise Company (in thousands of dollars): Condensed 2019 Balance Sheet 2019 Current assets $2,000 Net Fixed assets 3,000 Total assets $5,000 Accounts payable and accurals $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 Sunrise's earnings per share last year were $3.20. The common stock sells for $55.00, last year's dividend (Do)was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrise's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Sunrise's beta is 1.516. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment.
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