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Homework answers / question archive / The table shows a book balance sheet for the Wishing Well Motel chain

The table shows a book balance sheet for the Wishing Well Motel chain

Finance

The table shows a book balance sheet for the Wishing Well Motel chain. The company’s long-term debt is secured by its real estate assets, but it also uses short-term bank financing. It pays 10% interest on the bank debt, which is permanent financing and 9% interest on the secured debt. Wishing Well has 10 million shares of stock outstanding, trading at $90 per share. The expected return on Wishing Well’s common stock is 18%

Calculate Wishing Well’s WACC. Assume that the book and market value of Wishing Well’s debt are the same. The marginal tax rate is 35%.
Please show your work.

Balance sheet for Wishing Well, Inc. (in $ millions)
Cash & Market securities 100 Bank loan 280
Accounts receivable 200    
Inventory 50 Accounts payable 120
Current assets 350 Current Liabilities 400
Real estate 2100 Longterm debt 1800
Other assets 150 Equity 400
Total 2600 Total 2600

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