WACC BASED ON BV, MV UNDER DIFFERENT COSTS OF CAPITAL COMPONENTS FROM BALANCE SHEET DATA :

QUESTION :

The following are balance sheets for the Genatron Manufacturing

Corporation for the years 2013 and 2014:

BALANCE SHEET 2013 2014

Cash $50,000 $40,000

Accounts receivable 200,000 260,000

Inventory 450,000 500,000

Total current assets 700,000 800,000

Fixed assets (net) 300,000 400,000

Total assets $1,000,000 $1,200,000

Bank loan, 10% $90,000 $ 90,000

Accounts payable 130,000 170,000

Accruals 50,000 70,000

Total current liabilities $270,000 $330,000

Long-term debt, 12% 300,000 400,000

Common stock, $10 par 300,000 300,000

Capital surplus 50,000 50,000

Retained earnings 80,000 120,000

Total liabilities and equity $1,000,000 $1,200,000

a. Calculate the WACC based on book value weights. Assume an

after-tax cost of new debt of 8.63 percent and a cost of

common equity of 16.5 percent.

b. The current market value of Genatron’s long-term debt is

$350,000. The common stock price is $20 per share and

30,000 shares are outstanding. Calculate the WACC using

market value weights and the component capital costs in (a).

c. Recalculate the WACC based on book value and market

value weights assuming the before-tax cost of debt will be

18 percent, the company is in the 40 percent income tax

bracket, and the after-tax cost of common equity capital is

21 percent.