FIN419r6wk4Capital Budgeting D s Template 7xlsx Using market

FIN419_r6_wk4_Capital Budgeting D s Template 7)xlsx Using market value and book value (separately), find the adjusted WACC, using 30% tax rate. TAX 30% Component Debt Preferred Stock Common Stock Balance Sheet Value 5,000,000.00 4.000,000.00 2,000,000.00 Market Value 6,850,000.00 2,200,000.00 5,600,000.00 Cost of Capital 8% 10% 13% Refer to the Solved Example 7 on Page 334 of your text. ANSWER Book Value Weights Market Value Weights Adjusted WACC Debt Preferred Stock Common Stock Debt Preferred Stock Common Stock Market Value Book Vahue

Solution

Component

Balance Sheet Value

Market Value

Debt

50,00,000.00

68,50,000.00

Preferred Stock

40,00,000.00

22,00,000.00

Common Stock

20,00,000.00

56,00,000.00

TOTAL

1,10,00,000.00

1,46,50,000.00

Book Value Weights

Weights

Debt

[50,00,000.00 / 1,10,00,000.00]

45.45%

Preferred Stock

[40,00,000.00 / 1,10,00,000.00 ]

36.36%

Common Stock

[20,00,000.00 / 1,10,00,000.00 ]

18.19%

TOTAL

100%

Market Value Weights

Weights

Debt

[68,50,000.00 / 1,46,50,000.00 ]

46.76%

Preferred Stock

[22,00,000.00 / 1,46,50,000.00 ]

15.02%

Common Stock

[56,00,000.00 / 1,46,50,000.00 ]

38.22%

TOTAL

100%

*After Tax cost of Debt = 8% x [ 1- 0.30 ] = 5.6%

\" Adjusted WACC = [ After Tax Cost of Debt x Weight of Debt ] + [ Cost of Preferred stock x Weight of preferred stock ] + [ Cost of equity x Weight of common stock ]

Adjusted WACC – Using Book Value

= [ 5.6% x 0.4545 ] + [ 10% x 0.3636 ] + [ 13% x 0.1819 ]

= 2.55% + 3.64% + 2.36%

= 8.55%

Adjusted WACC – Using Market Value

= [ 5.6% x 0.4676 ] + [ 10% x 0.1502 ] + [ 13% x 0.3822 ]

= 2.62% + 1.5% + 4.97%

= 9.09%

Component	Balance Sheet Value	Market Value
Debt	50,00,000.00	68,50,000.00
Preferred Stock	40,00,000.00	22,00,000.00
Common Stock	20,00,000.00	56,00,000.00
TOTAL	1,10,00,000.00	1,46,50,000.00