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AFN & WACC Calculations

1. Finegan Services Ltd. has the following year end balance:

Cash $1,000 A/P $500
A/R 3,500 Accruals 2,000
Inventory 10,000 Long-Term Debt 15,000
Net Fixed Assets 23,000 Common Equity 20,000
Total Assets $37,500 Total Liabilities $37,500

FSL's fixed assets are currently being used at 80% of capacity; its current annual sales are $81,000,000 and are expected to increase next year by 23%. FSL is publicly held and its annual dividend is targeted at 60% of net income; Its after-tax profit margin is 7.5%. Use the formula method to calculate FSL's AFN.

2. Galactic Transportation, Inc., has a simple capital structure consisting of debt and common equity only. Its debt ratio is 40% and it is in a 31% tax bracket. As long as it maintains its current capital structure, it should be able to incur additional debt at the same cost of its current debt (8.25% after-tax). Galactic's common stock is Amex listed and currently trades at $72.25 per share. The annual common dividend of $8.125 per share is expected to grow at a constant 5 percent rate. Assuming a flotation cost of 8%, calculate the cost of equity for newly issued common stock. Calculate its WACC.

Solution Summary

The AFN and WACC calculations are given for Finegan Service Ltd.