FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Here is the condensed 2021
| 2021 | ||||
| Current assets | $ | 1,600 | ||
| Net fixed assets | 2,400 | |||
| Total assets | $ | 4,000 | ||
| Accounts payable and accruals | $ | 600 | ||
| Short-term debt | 200 | |||
| Long-term debt | 1,275 | |||
| 325 | ||||
| Common stock (40,000 shares) | 775 | |||
| 825 | ||||
| Total common equity | $ | 1,600 | ||
| Total liabilities and equity | $ | 4,000 |
Skye's earnings per share last year were $2.90. The common stock sells for $45.00, last year's dividend (D0) was $1.90, and a flotation cost of 8% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye's preferred stock pays a dividend of $3.00 per share, and its preferred stock sells for $25.00 per share. The firm's before-tax cost of debt is 8%, and its marginal tax rate is 25%. The firm's currently outstanding 8% annual coupon rate, long-term debt sells at par value. The market risk premium is 6%, the risk-free rate is 7%, and Skye's beta is 1.544. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.475 million.
Do not round intermediate calculations. Round your answers to two decimal places.
-
Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the
cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.After-tax cost of debt: fill in the blank 2 %
Cost of preferred stock: fill in the blank 3 %
Cost of retained earnings: fill in the blank 4 %
Cost of new common stock: fill in the blank 5 %
Now calculate the cost of common equity from retained earnings, using the
CAPM method. -
If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)
WACC1:
WACC2:
Transcribed Image Text:Calculating the WACC
Skye Computer Company: Balance Sheet as of December 31
(in thousands of dollars)
Current assets
Net fixed assets
Total assets
Accounts payable and accruals
Short-term debt
Long-term debt
Preferred stock
Common stock
Retained earnings
Total common equity
Total liabilities and equity
Last year's earnings per share
Current price of common stock, Po
Last year's dividend on common stock, Do
Growth rate of common dividend, g
Flotation cost for common stock, F
Common stock outstanding
Current price of preferred stock, Pp
Dividend on preferred stock, Dp
Preferred stock outstanding
Before-tax cost of debt, ra
Market risk premium, ™M - RF
Risk-free rate, "RF
Beta
Tax rate
Total debt
2021
$1,600
2,400
$4,000
$600
200
1,275
325
775
825
$1,600
$4,000
$2.90
$45.00
$1.90
9%
8%
40,000
$25.00
$3.00
15,000
8%
6%
7%
1.544
25%
$1,475 thousand
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