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# Calculate Wishing Well's Motel Chain WACC

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Table 19.3 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 percent interest on the bank debt and 9 percent 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 percent.
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 percent.

See attached for table

Suppose Wishing Well is evaluating a new motel and resort on a romantic site in Madison County, Wisconsin. Explain how you would forecast the after-tax cash flows for this project. (Hints: How would you treat taxes? Interest expense? Changes in working capital?)

To finance the Madison County project, Wishing Well will have to arrange an additional \$80 million of long-term debt and make a \$20 million equity issue. Underwriting fees, spreads, and other costs of this financing will total \$4 million. How would you take this into account in valuing the proposed investment?

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Table 19.3 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 percent interest on the bank debt and 9 percent 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 percent.
Calculate Wishing Well's WACC. Assume that the book and market values of Wishing Well's debt are the same. The marginal ...

#### Solution Summary

Response provides the steps to calculate the Wishing Well's WACC

\$2.19

## Dividend Discount Model and WACC

1. In March 2004, Fly Paper's stock sold for about \$73. Security analysts were forecasting a long-term earnings growth rate of 8.5 percent. The company is expected to pay a dividend of \$1.68 per share
a. Assume dividends are expected to grow along with earnings at g 8.5 percent per year in perpetuity. What rate of return r were investors expecting?
b.Fly Paper was expected to earn about 12 percent on book equity and to pay out about 50 percent of earnings as dividends. What do these forecasts imply for g? For r? Use the perpetual-growth DCF formula.

2. The table 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 percent interest on the bank debt and 9 percent 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 percent.
Balance sheet for Wishing Well, Inc. (figures in \$ millions).

Cash and marketable securities 100 Bank loan 280
Inventory 50 Accounts payable 120
Accounts receivable 200 Current liabilities 400
Current assets 350
Real estate 2,100 Long-term debt 1,800
Other assets 150 Equity 400
Total 2,600 Total 2,600

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 percent.

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