Question

Question 18 (1 point)

The Clarion Pop Corporation has the following items on their income and balance sheets (values in tables are in thousands:

Balance Sheet Items
(Assets)

	Last Year	Two Years Ago
Cash	460	440
Accounts Receivable	540	520
Inventory	285	288
Total Current Assets
Fixed Assets	4700	4770
Depreciation	2335	2096
Net Fixed Assets

Balance Sheet Items
(Liabilities)

Accounts Payable	540	520
Notes Payable	90	95
Total Current Liabilities
Long Term Liabilities	1100	1000
Total Liabilities
Preferred Stock	1160	1160
Common Stock	3210	3210
Retained Earnings	1405	1015
Total Liabilities and Equity

Income Statement Items

	Past Year	Two Years Ago
Sales	3020	2700
Cost of Goods Sold	1840	1760
Operating Expenses	590	530
Interest (Paid L/T Debt)	55	86
Taxes Paid	89	75
Preferred Stock Dividends Paid	74	21

What is the Weighted average cost of capital for last year for Clarion Pop if the rate on the common stock is 11.90%?

Express your answer as .xxxx.

(Hint: First Calculate the Percentages of Common Stock, Preferred Stock, and Long-Term Debt. Do not include Retained Earnings. Net compute the rate [percentage cost] for Long-Term Debt and Preferred Stock. Then compute the weighted average.)

Your Answer:

Answer 1

Total value of common stock , preferred stock and debt = 3210 + 1160 + 1100 = $5470 thousands

Percentages of

Common Stock = 3210 / 5470 = 58.68%

Preferred stock = 1160 /5470 = 21.21%

Long term debt = 1100 / 5470 = 20.11%

Cost of long term debt = Interest / Long term debt = 55 / 1100 = 5.00%

Cost of preferred stock = Dividends / Preferred stock = 74 / 1160 = 6.38%

Cost of common stock = 11.90 %

wacc = % common stock * cost of common stock + % preferred stock * cost of preferred stock + % debt * cost of debt

wacc = 58.68% * 11.60% + 21.21% * 6.38% + 20.11% * 5.00%

wacc = 0.068073 + 0.013528 + 0.010055

wacc = 0.091656

Your answer : wacc is 9.1656%

Note: tax is not considered for cost of debt calculation