Homework SourseBalance Sheet Cash 15000000 Accts receivable 20000000 Invent
Balance Sheet
Cash 150,000.00
Accts receivable 200,000.00
Inventory 220,000.00
Total Liabilities 375,000.00
Fixed Assets 490,000.00
Total Assets 1,040,000.00
Net Income 290,000.00
Payout ratio 15%
Cash flow 362,000.00
Company can borrow at 5%
The company’s tax rate is 32%
The t-bill rate is 1.2%
Market risk rate is 7.4%
The company has twice the volatility of the overall market.
What is the sustainable growth rate?
A .4361
B .9629 E. none of the above
C .0385 D. .0370
What is the after tax cost of Debt?
A.043 C. .034 E. none of the above
B.136 D. .092
What is the cost of equity?
A.124 C. .148 E.none of the above
B .16 D. .15
What is the Wacc ?
A .087 C. .01227 E. .6395
B .034 D. .0993
Solution
What is the sustainable growth rate?
Sustainable growth rate (g) = ROE * retention ratio
ROE = Net Income/ Total equity = Net Income/(total assets - total liabilties) = 290,000/(1,040,000-375,000) = 0.4361
Retention ratio = 1 -payout = 1-0.15 = 0.85
g = 0.4361*0.85 = 0.3706
Susbtaiunable growth rate = 0.3706 (Option E: None of the above)
What is the after tax cost of Debt?
The after tax cost = pretax cost *(1-tax rate) = 5%*(1-0.32) = 3.4% =0.034(Option C)
What is the cost of equity?
Cost of equity = rf + beta*(rm -rf)
rf = 1.2%, rm = 7.4%, beat = twice of market = 2*1 = 2
Cost of equity = 1.2+2*(7.4-1.2) = 13.6% = 0.136 (Option E: None of the above)
What is the Wacc ?
Weight of equity = (1,040,000-375,000)/1,040,000 = 0.6394
Weight of debt = 1-0.6394 = 0.3606
Cost of debt = 3.4%, Cost of equity 13.6%
WACC = 0.6394*13.6% +0.3606*3.4% = 9.93% = 0.0993 (Option D)
