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Homework answers / question archive / 13

13. (i)

The total book value of WTC’s equity is $10 million, and book value per share is $16. The stock has a market-to-book ratio of 1.5, and the cost of equity is 13%. The firm’s bonds have a face value of $6 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 9%, and the firm’s tax rate is 21%. What is the company’s WACC? **(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)**

(ii)

In 2018, Caterpillar Inc. had about 658 million shares outstanding. Their book value was $33.0 per share, and the market price was $159.80 per share. The company’s balance sheet shows that the company had $14.80 billion of long-term debt, which was currently selling near par value.

**a.** What was Caterpillar’s book debt-to-value ratio? **(Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)**

**b.** What was its market debt-to-value ratio? **(Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)**

**c.** Which measure should you use to calculate the company’s cost of capital?

(iii)

Olympic Sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of $40 million, a maturity of 15 years, and a yield to maturity of 10%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 10%. The face value of the issue is $45 million, and the issue sells for 95% of par value. The firm's tax rate is 30%.

**a. **What is the before-tax cost of debt for Olympic?

**b. **What is Olympic's after-tax cost of debt?

**(For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)**

(iV)

Pangbourne Whitchurch has preferred stock outstanding. The stock pays a dividend of $8 per share, and sells for $50. The corporate tax rate is 21%. What is the percentage cost of the preferred stock? **(Enter your answer as a whole percent.)**

**(V)**

Reliable Electric is a regulated public utility, and it is expected to provide steady dividend growth of 8% per year for the indefinite future. Its last dividend was $2 per share; the stock sold for $40 per share just after the dividend was paid. What is the company’s percentage cost of equity? **(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)**

(Vi)

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 21% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 7% and stockholders will require 14%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 21%) will be $59 million and that investment in plant and net working capital will be $21 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

**a. **What is the total value of Icarus?

**b. **What is the value of the company’s equity?

**(For all the requirements, do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)**