Question

The Anson Jackson Court (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 4%. Its earnings before interest and taxes (EBIT) are $89,000, and it is a zero growth company. AJC's current cost of equity is 8%, and its tax rate is 25%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Refer to the data for the Anson Jackson Court Company (AJC). What is AJC's current total market value and weighted average cost of capital?

a. $650,000; 7.90% b. $800,000; 7.90% c. $800,000; 7.40% d. $800,000; 6.75% e. $650,000; 6.75%

Answer #1

**Ans : i) Calculation of AJC's Current Total Market
Value**

Market Value of Equity = Number of outstanding shares * Price
per share

= 10,000 shares * $60

= $600,000

Total Market Value = Market Value of Equity + Market Value of
Debt

= $600,000 + $200,000

= $800,000

**Total Market Value = $800,000**

**ii) Computation of Weighted Average Cost of
Capital**

Debt Proportion= Market Value of Debt / Total Market Value =
200,000 / 800,000 = **0.25**

Equity Proportion = Market Value of Equity / Total Market Value
= 600,000/ 800,000 = **0.75**

Cost of Debt after tax = Cost of Debt * (1 - Tax Rate)

= 4% (1 - 0.25)

= **3%**

**WACC =** Cost of Equity * Equity Proportion +
Cost of debt after tax * Debt proportion

= 8% * 0.75 + 3% * 0.25

= 6% + 0.75%

= **6.75%**

**WACC = 6.75%
AJC's Current Total Market Value is $800,000 and Weighted Average
Cost of Capital is 6.75%.**

The A. J. Croft Company (AJC) currently has $200,000 market
value (and book value) of perpetual debt outstanding carrying a
coupon rate of 6 percent. Its earnings before interest and taxes
(EBIT) are $100,000, and it is a zero-growth company. AJC's current
unlevered beta is 0.5, and its tax rate is 40 percent. The firm has
10,000 shares of common stock outstanding selling at a price per
share of $60.00. The firm is considering moving to a capital
structure that...

The A. J. Croft Company (AJC) currently has $200,000 market
value (and book value) of perpetual debt outstanding carrying a
coupon rate of 6 percent. Its earnings before interest and taxes
(EBIT) are $100,000, and it is a zero-growth company. AJC's current
unlevered beta is 0.5, and its tax rate is 40 percent. The firm has
10,000 shares of common stock outstanding selling at a price per
share of $60.00. The firm is considering moving to a capital
structure that...

A us based company has a market value of its debt equal to $40
million and has 3 million outstanding shares of stock , each
selling for $20 per share. The company pays a 5% rate of interest
on its debt and has a beta of 1.41. The corporate tax rate is 34%.
The risk premium on the market is 9.5%. the current treasury bill
rate is 1%. What is the firm’s weighted average cost of
capital?

Marshal Ltd currently has $250 million of market value debt
outstanding. The 9 percent coupon bonds (semiannual pay) have a
maturity of 15 years and are currently priced at $877.07 per bond.
The company also has an issue of 2 million perpetual preference
shares outstanding with a market price of $27. The perpetual
preference shares offer an annual dividend of $1.20. Imaginary also
has 14 million shares of ordinary shares outstanding with a price
of $20.00 per share. The company...

Book value versus market value components:
Compare Trout, Inc. with Salmon Enterprises, using the balance
sheet of Trout and the market data of Salmon for the weights in the
weighted average cost of capital: If the after-tax cost of debt
is 8.2% for both companies and the cost of equity is 14.55%, which
company has the higher WACC?
What is the book value adjusted WACC for Trout,
Inc.?
What is the book value adjusted WACC for Salmon
Enterprises?
Trout Inc:...

3. [Capital Structure and Growth] Edwards Construction
currently has debt outstanding with
a market value of $70,000 and a cost of 8%. The company has EBIT of
$5,600 that is
expected to continue in perpetuity. Assume there are no
taxes.
a. What is the value of the company’s equity? What is the
Debt-to-value ratio?
b. What are the equity value and debt-to-value ratio if the
company’s growth rate is 3%?
c. What are the equity value and debt-to-value ratio if...

Minion, Inc., has no debt outstanding and a total market value
of $273,600. Earnings before interest and taxes, EBIT, are
projected to be $43,000 if economic conditions are normal. If there
is strong expansion in the economy, then EBIT will be 17 percent
higher. If there is a recession, then EBIT will be 28 percent
lower. The company is considering a $145,000 debt issue with an
interest rate of 6 percent. The proceeds will be used to repurchase
shares of...

Capital Structure and Growth Edwards Construction currently has
debt outstanding with a market
value of $310,000 and a cost of 6 percent. The company has an EBIT
of $18,600 that is expected to
continue in perpetuity. Assume there are no taxes.
a. What is the value of the company’s equity? What is the
debt-to-value ratio?
b. What is the equity value and debt-to-value ratio if the
company’s growth rate is 2 percent?
c. What is the equity value and debt-to-value...

The company has a market value of debt of $200m and market value
of equity of $900m. The beta of the company is 0.8. The risk-free
rate is currently 4 per cent per annum and the company can borrow
at 2 per cent per annum above the risk-free rate. They pay
corporation tax at 30 per cent. The expected return on the market
is 10 per cent per annum. Calculate Strachan's current weighted
average cost of capital.

Corporation wants to determine its current market value
weighted-average cost of capital. The market value of the firm's
bonds is $1.5 million and the bond yield is 12.00%. Company has
125,000 shares of common stock outstanding and the current market
price is $40 per share. The firm's tax rate is 30% and its beta is
1.2. The U.S. T-bill rate of return is 6.00% and the total market
index rate of return is 11.00%. What is Company's market value
weighted-average...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago