Question

(1) Why do companies need capital?

(2) What sources of long-term debt capital do firms use?

(3) Write the formula to calculate the weighted average cost of
capital

Answer #1

1) All the companies require capital to purchase assets to carry out the operations of the entity, Also to maintain the day to day operations of the company. The capital to acquire assets are satisfied through the common stock and debt capital whereas the day to day affairs are satisfied through working capital like current assets and current liabilities.

2) Surces of lon term debt capital are Loans from banks and fincial instituitions, Issue of notes , bonds (long term in nature) and issue of debentures.

3) Weighted average cost of capital = Market value of equity / Total value * Cost of equity + Market value of debt *cost of debt (post tax)/ Total value.

Total value of firm = Market value of equity + Market value of debt

The WACC calculation is based on :
1) The book value of all sources of long-term capital
2) The book value of debt and the market value of all other
sources of capital
3) The market value of equity only.
4) The market values of all sources of long-term capital
5) The book values of debt and equity only

West Oil Company, LLC has three long
term loans (interest bearing debt): loan #1 with a balance of
$300,000 at 8% interest; loan #2 with a balance of $400,000 at 5%
interest, and loan #3 with a balance of $100,000 at 10% interest.
The company has accounts payable of $70,000 (non-interest bearing)
and equity of $1,200,000. It estimates that its cost of equity is
11%. Its tax rate is 34%
1. What is the company’s weighted average cost of capital...

1. Compute the capital structure of each of the
following companies.
Use yahoo finance, or another financial site to research
the financial information you need to compute capital structure.
Under comments, you should say if the capital structure is good or
bad based on the amount of debt and stock used to finance
operations.
Company
XOM
WMT
AAPL
GM
Capital Structure
Comments
2. Research the weighted average cost of capital, WACC*
for the following companies. Which one is the...

2. Premier Care Corporation (PCC) has long term debt at 5% in
the amount of $20 million. Equity totals $30 million. PCC’s
marginal tax rate is 40%, and the commonly used beta for the
industry is 1.2 while government securities are paying 2%. The
market returns 9% on average. What is XYZ’s weighted average cost
of capital using the Capital Asset Pricing Method?

Assume that a for-profit company has $8 million of long-term
debt with an interest rate of 6%. It has $3 million of preferred
stock with a required dividend rate of 8%. And it has $4 million of
common stock that is estimated to have a cost of capital of 10%.
What is its weighted average cost of capital? In order for your
answer to be graded correctly, Do not use any symbols (e.g. $) or
comma. Use only numeric values....

1. Why do we need to use a weighted average for the measurements
made with the caliper? How
much does your weighted average differ from a non-weighted
average?
2. When can you replace a weighted average with a non-weighted
average and why?
3. The statistical analysis method assumes that all of your
measurements are independent of each
other and randomly distributed about the best estimate for the
mean. Is this a valid assumption?

Weighted Average Cost of
Capital (WACC)
1
In its 2017 10-k
Black Diamond Equipment reported the following information about
its capital structure. The firm had long term public debt
outstanding of 500 million dollars and short term debt of 31.5
million dollars. It's average cost of debt was 8.25%. The firm had
10 million public shares outstanding and each share was currently
trading for $84.75. It's cost of equity was 15.6%. The firms
current marginal tax rate was 35%. What...

Debt management ratios
Companies use different sources for financing their
assets—internal resources as well as external resources, and debt
funding versus equity financing.
Aunt Dottie’s Linen Inc. reported no long-term debt in its most
recent balance sheet. A company with no debt on its books is
referred to as:
A company with no leverage, or an unleveraged company
A company with leverage, or a leveraged company
Which of the following is true about the leveraging effect?
Under economic growth conditions,...

LIS Company has $50 million in long-term debt, $75 million in
shareholder’s equity [both figures are market value basis]. The
cost of equity is 14%, cost of long-term debt is 12% and the tax
rate is 25%. What is the weighted average cost of capital [WACC]
for LIS?
LIS Company has a pretax income of $12.5 million. What
is the value of the company based on correct calculation of
#1?

What is the weighted average cost of capital of a company that
has debt of $8.505 million and equity of $11.143 million? The
average before-tax cost of debt is 7.30% per annum and the average
cost of equity is 10.10% per annum. The company tax rate is 30%.
Please use three methods – a mathematical formula,
SUMPRODUCT function and SUM array function, to compute the weighted
average cost of capital.

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