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%.
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