Question

The following financial statement & market value data pertains to Southwater Inc., a manufacturer of women's suits (in million USD):

Table 6

Financial Statement & Market Value Data Pertains to Southwater Inc.

1	Total Assets	$154,287
2	Interest-Bearing Debt	$33,984
3	Average Pre-tax borrowing cost	7.75%
4	Book Value Equity	$21,365
5	Market Value Equity	$66,735
6	Income Tax Rate	39.6%
7	Market Equity Beta	0.77
8	Market Risk Premium	7.45%
9	Risk-free Rate	2.5%

1. Calculate the company's cost of equity capital.
2. Calculate the weight on debt capital that should be used to determine Northridge’s weighted-average cost of capital.
3. Calculate the weight on equity capital that should be used to determine Northridge’s weighted-average cost of capital.
4. Calculate Northridge’s weighted-average cost of capital.

Answer 1

1)cost of equity= risk free rate+ beta*(market risk premium)

=2.5+0.77*7.45

=8.24%

2)WEIGHT OF DEBT = 0.34

3)WEIGHT OF EQUITY= 0.66

4)WACC

PRE TAX COST OF DEBT = 7.75%

POST =7.75(1-0.396)

=4.68

WACC IS 7.04%