| 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. | ||||||
(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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