Question

1. The following financial statement data pertains to Halsey, Inc Total Assets $195,245 Interest-Bearing Debt $85,680...

1. The following financial statement data pertains to Halsey, Inc
Total Assets $195,245
Interest-Bearing Debt $85,680
Average borrowing cost 11.25%
Common Equity:
Book Value $42,154
Market Value $135,849
Marginal Income Tax Rate 37%
Market Equity Beta 0.9
Expected Market Premium 7.50%
Risk-free interest rate 4.70%
a. Calculate the company's cost of equity capital. 11%
b. Calculate the weight on debt capital that should be used to determine Halsey’s weighted-average cost of capital.
c. Calculate the weight on equity capital that should be used to determine Halsey’s weighted-average cost of capital.
d. Calculate Halsey’s weighted-average cost of capital.

Homework Answers

Answer #1

(a) Company's Cost of Equity Capital    

Cost of Equity Capital [as per CAPM] = Rf + Beta[Rm – Rf]

= 4.70% + 0.90[7.50% - 4.70%]

= 4.70% + 2.52%

= 7.22%

(b) Weight on Debt Capital

Weight on Debt Capital =Value of Debt/[Market Value of Equity + Value of Debt]

= $85,680 / [$135,849 + 85,680 ]

= $85,680 / 221,529

= 0.39 or 39%

(c) Weight on Equity Capital

Weight on Equity Capital = Market Value of Equity / [ Market Value of Equity + Value of Debt]

= $135,849 / 221,529

= 0.61 or 61%

(d) Halsey’s weighted-average cost of capital.

Weighted-average cost of capital = [ After Tax Cost of Debt x Weight of Debt ] + [ Cost of equity x Weight of Equity ]

= [ (11.25% x 0.63) x 0.39 ] + [ 7.22% x 0.61 ]

= 2.74% + 4.43%

= 7.17%

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