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13

Finance

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.)

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