JimMart: Weighted Average Cost of Capital (WACC)
Not what you're looking for?
A stock analyst has obtained the following information about JimMart, a large retail chain.
(1) The company has non-callable bonds with 20 years maturity remaining and a maturity value of $1000. The bonds have a 12 percent annual coupon and currently sell at a price of $1273.8564.
(2) Over the past four years, the returns on the market and on JimMart were as follows:
Year Market JimMart
2003 12.0% 14.5%
2004 17.2% 22.2%
2005 -3.8% -7.5%
2006 20.0% 24.0%
(3) The current risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company's tax rate is 35 percent.
The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity. What is the company's estimated weighted average cost of capital (WACC)?
How does this process compare/differ from finding the cost of funds at a commercial bank? What are the potential difficulties involved in the use of book versus market values particularly as it applies to a financial institution?
Purchase this Solution
Solution Summary
The weighted average cost of capital is calculated. Potential difficulties a financial institution could face are explained as well.
Solution Preview
Cost of Debt 12%
Year Market JimMart
2003 12% 14.50%
2004 17.20% 22.20%
2005 -3.80% -7.50%
2006 20% 24%
Beta 1.02
Risk-free rate 6.35%
Expected return of ...
Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.