Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for...

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Examine the following book-value balance sheet for UniversityProducts Inc. The preferred stock currently sells for $30 per shareand pays a dividend of $3 a share. The common stock sells for $16per share and has a beta of 0.8. There are 4 million common sharesoutstanding. The market risk premium is 10%, the risk-free rate is6%, and the firm’s tax rate is 40%.
BOOK-VALUE BALANCE SHEET (Figures in $ millions) AssetsLiabilities and Net Worth Cash and short-term securities $ 2.0Bonds, coupon = 5%, paid annually (maturity = 10 years, currentyield to maturity = 6%) $ 12.0 Accounts receivable 4.0 Preferredstock (par value $15 per share) 3.0 Inventories 8.0 Common stock(par value $0.10) 0.4 Plant and equipment 20.0 Additional paid-instockholders’ equity 7.6 Retained earnings 11.0 Total $ 34.0 Total$ 34.0
a. What is the market debt-to-value ratio of the firm? (Do notround intermediate calculations. Enter your answer as a percentrounded to 2 decimal places.)
b. What is University’s WACC? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces.)

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3.7 Ratings (554 Votes)

All financials below are in mn Nos of shares outstanding is in mn and share price is in share Part a Face value FV 12 Bonds coupon 5 paid annually Hence PMT 5 x FV 5 x 12 060 Period maturity 10 years Rate See Answer

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Examine the following book-value balance sheet for UniversityProducts Inc. The preferred stock currently sells for $30 per shareand pays a dividend of $3 a share. The common stock sells for $16per share and has a beta of 0.8. There are 4 million common sharesoutstanding. The market risk premium is 10%, the risk-free rate is6%, and the firm’s tax rate is 40%.BOOK-VALUE BALANCE SHEET (Figures in $ millions) AssetsLiabilities and Net Worth Cash and short-term securities $ 2.0Bonds, coupon = 5%, paid annually (maturity = 10 years, currentyield to maturity = 6%) $ 12.0 Accounts receivable 4.0 Preferredstock (par value $15 per share) 3.0 Inventories 8.0 Common stock(par value $0.10) 0.4 Plant and equipment 20.0 Additional paid-instockholders’ equity 7.6 Retained earnings 11.0 Total $ 34.0 Total$ 34.0a. What is the market debt-to-value ratio of the firm? (Do notround intermediate calculations. Enter your answer as a percentrounded to 2 decimal places.)b. What is University’s WACC? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces.)