54 case questions Essay

E. Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2010. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2010. Estimate the market value-based weighted average cost of capital for Castillo Products.

The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comp­trol­ler currently uses for the company’s capital structure.

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

The debt/equity ratio for Boeing is provided in exhibit 10, 0.525, from where we can infer the weights of both debt and equity.

Chandler knew that the maximum value of the firm was achieved when the weighted average cost of capital was minimized. Thus she intended to estimate what the cost of equity and the wacc might be if wrigley pursued this capital structure change. The projected cost of debt would depend on her assessement of wrigley’s debt rating after recapitalization and on current capital market rates.

Assuming that there were no charges to retained earnings other than dividends of $62,000, the net income for 2010 was:

| (TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt to assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its

Should you use book or market value weights? If you want market value of debt use (BV/100) * Price

2. A company has a capital structure which consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct? a. b. c. d. The cost of equity financing is greater than the cost of debt financing. The WACC exceeds the cost of equity financing. The WACC is calculated on a before-tax basis. The

Analyzing above table, it seems that weighted average cost of debt using book value, the weights are 2.76 percent, and using market value, the weights are 2.69 percent. It seems irrelevant whether we use book or market values to calculate the cost of debt for Dell, which means it would not make a difference whether the book or market values were used because they are the approximately the same, and yields almost the same cost of debt.

4. Issued 800 shares of common and 50 shares of preferred for equipment. The common had a fair value

Given the following information on S & G Inc. capital structure, compute the company's weighted average cost of capital.

• Use the weighted-average cost of capital to value a business given forecasts of its future cash flows;

1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock.

The expectations of the weighted average cost of capital (WACC) varies when using market values of equity versus book value of equity because they are fundamentally different when attempting to analyze a business for investment endeavors. Book value and market value can determine if a stock or business venture is a practical one. Book value is simply the value of a business on its books or sometimes known as the accounting value. In comparison, the market value is determined by market investors and is the more meaningful value because it is the value placed on a stock despite what the book value is. These values can differ considerably and depends of various factors intrinsic to understanding overall value. Industry or sector type, financial strength or confidence of the business to generate profit plays a role in market value where these are not considered in the book value. For example, if the book value is greater than market value, investors will consider the value of the company is worth less in the financial market than what the book value states. In essence, the opportunity to gain stock in a business can be a valuable investment if the market perception is ultimately wrong. On the other hand, the dynamics of market value is often higher for stronger companies as earning power will inflate the market value than the actual book value. This connection is important to consider as a company’s market value can change on any given day versus the book value. There will be