Question

# The Anson Jackson Court (AJC) currently has \$200,000 market value (and book value) of perpetual debt...

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%

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%.

#### Earn Coins

Coins can be redeemed for fabulous gifts.