Exhibit 1
Flight plan Consulting, Inc. (B)
Balance Sheet
December 31,2001
($000’s)
Current Assets $1,500 Current Liabilities $400
Fixed Assets 1,500 Long-Term Debt 600
Common Stock 400
($1 par)
Retained Earnings 1,600
Total Assets $3,000 Total $3,000
Exhibit 2
Flight Plan Consulting, Inc.
Selected Capital Market, Company, Industry Data
FPC, Inc. may issue long-term debt at par, with a coupon rate of 5 percent; its existing $1,000 par bonds carried a coupon rate of 7% (see FPC, Inc. A).
The firm’s stock price had risen to $21.50 in recent weeks, and the increase in the firm’s net income after-tax is 16%.
A broad market average of common stocks had risen at an annualized rate of 15 percent in recent weeks. The return on that average is now 16%. (The yield on 10-year U.S.Government bonds is 5.01%. The stock of FPC, Inc. was 10 percent more volatile that the market average of stocks.) Flight Plan Consulting falls into the 30% (combined) tax bracket.
Many specialized consulting firms, if they experienced substantial net income growth, have a long-term debt to total asset ratio of approximately 40 percent on average.
Calculate the Marginal weighted average cost of capital (WACC) for FPC, INC.
Debt Value = D = Long-Term Debt = $ 600 and Equity Value = E = Common Stock + Retained Earnings = 400 + 1600 = $ 2000
New debt can be issued at par , thereby implying a pre-tax cost of debt of 5 % for new debt.
Cost of Debt = kd = 5 %
Market Return = 16 %, RIsk Free Rate = 5.01 % and Stock is 10 % more volatile than the market average stocks thereby implying a beta of 1.1
Cost of Equity = ke = 5.01 + 1.1 x (16 - 5.01) = 17.099 %
Firm Value = 600 + 2000 = V = $ 2600
Target Debt to Asset Ratio = 0.4
Tax Rate = t = 30 %
Marginal WACC = 5 x (1-0.3) x (0.4) + 17.099 x (0.6) = 11.66 % approximately.
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