Part c Suppose one year ago, Mazzola Company had inventory in Britain valued at

Question

Part c

Suppose one year ago, Mazzola Company had inventory in Britain valued at 240,000 pounds.       The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What does the U.S. dollar gain or loss in inventory value because of the change in exchange rates?

Part d

            Borinni Inc. paid a $2.37 dividend recently, the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company’s WACC if all the equity used is from retained earnings?

Explanation / Answer

1

beginning inventory in dollars=240000*2=480000
ending inventory in dollars=240000*1.82=436800
So, loss=480000-436800=43200 dollars

2

WACC=45%*7.5%*(1-40%)+55%*(2.37*1.055/52.5+5.5%)=7.6694%

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