Here is the condensed 2012 balance sheet for Skye Computer Company (in thousands
ID: 2634608 • Letter: H
Question
Here is the condensed 2012 balance sheet for Skye Computer Company (in thousands of dollars):
Long term debt
Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year
Endo of 2012 BV CAP STRUCT MV CAP STRUC Current assets 2,000 TOTAL % TOTAL % Net Fxes assets 3,000 Total assets 5,000 Current liabilities 900Long term debt
1,200 1200 29 1200 28 Preferred stock (10K shares) 250 250 6 300 7 Common stock (50K shares) 1,300 Reained earnings 1,350 Total common equity 2,650 2650 65 2750 65 Total liabilities & equity 5,000 4100 100 4250 100Explanation / Answer
Cost of common equity(DCF) = Currnet year dividend/Market price + Growth rate
Current year dividend is = Last year dividend*(1+g)
= $2.10*(1+0.09)
= $2.10*(1.09)
= $2.289
Cost of common equity = $2.289/$55 + 0.09
= 0.0416 +0.09
= 0.01316
=13.16%
Cost of newly issued common stock:
For calculating newly issued common stock, here we have to deduct the Flotation charges. Flotation charges are 10% on market price of the common stock.
Flotation charges = 10%*$55
= $5.5
New market price is = $55 - $5.5
=$49.5
Cost of newly issued common stock = $2.289/$49.5 + 0.09
= 0.0462 +0.09
= 0.1362
= 13.62%
Cost of preferred stock:
Cost of preferred stock = Preferred dividend/Market price of preferred stock
= $3.30/$30
= 0.11
= 11%
Cost of debt:
Here, cost of debt before taxes is 10%.
Cost of debt after taxes = Cost of debt before taxes*(1-tax rate)
= 10%*(1-0.35)
= 10%*0.65
= 6.5%
Therefore cost of debt after-taxes is 6.5%
Calulation of WACC:
WACC = Cost of debt after-taxes*Propotion of debt + Cost of equity*propotion of equity+Cost of preferred stock*propotion of preferred stock
Market value of total debt, equity and preferred stock = 500
Proportion of debt = Value of debt/Total value of firm
= 1200/5000
= 0.24
Proportion of equity = Value of equity/Total value of firm
= 2650/5000
= 0.53
Proportion of preferred stock = Value of preferred stock/Total value of firm
= 250/5000
= 0.05
WACC = 6.5%*0.24 + 13.62%*0.53+11%*0.05
= 1.56%+7.2186%+0.55%
=9.3286%