I have the answer, but need to know what formulas are used to get to those answe
ID: 2613240 • Letter: I
Question
I have the answer, but need to know what formulas are used to get to those answers.
The table below 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 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 values of Wishing Well's debt are the same. The marginal tax rate is 35%.
Cash and marketable Securities - 100M Bank Loan - 280M
Accounts Receivable - 200M Accounts Payable - 120M
Inventory - 50M Current Liabilities - 400M
Current Assets - 350 M Long-term Debt - 1800
Real Estate - 2,100M Equity - 400M
Other assets - 150 Total - 2,600M
Total - 2,600M
Answers:
Capital Structure Proportions are:
Bank Debt (rd – 10%) 280M 9.4%
Long Term Debt (rD – 9%) 1800M 60.4
Equity (rE – 18 percent, 90 X 10M shares) 1900M 30.2
WACC = 9.6%
Explanation / Answer
so WACC = 9.58% (Approx 9.60 %)
cost(A) Value weights(value/total) (B) weighted cost (A*B) After tax Bank debt 10(1-.35) 6.50 280 .09396 [280/2980] .6107 After tax Long term debt 9(1-.35) 5.85 1800 .6040 [1800/2980] 3.5334 Equity 18 900 .3020 [900/2980] 5.436 2980 9.58