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WACC Balance Sheet Liabilities and Equity

1. Andyco, Inc., has the following balance sheet and an equity market-to-book ratio of 1.8. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation?

Assets Liabilities and Equity
$1,100 Debt $500
Equity $600

The weight for this debt is __________% round to two decimals

2. Laurel, Inc., has debt outstanding with a coupon rate of 5.8% and a yield to maturity of 6.8%. Its tax rate is 35%. What is Laurel's effective (after-tax) cost of debt? Note: Assume that the debt has annual coupons.
Laurelâ??s effective (after-tax) cost of debt is ______% round to 4 decimals

3. Steady Company's stock has a beta of 0.20.
If the risk-free rate is 6.0% and the market risk premium is 7.0%, what is an estimate of Steady Company's cost of equity?
Steady Company's cost of equity is _______% round to one decimal place

4. Pfd Company has debt with a yield to maturity of 7.0 %, a cost of equity of 13.0%, and a cost of preferred stock of 9.0%. The market values of its debt, preferred stock, and equity are $10.0 million, $3.0 million, and $20.0 million, respectively, and its tax rate is 38%.
What is the firm's weighted average cost of capital (WACC)?
PFD Company's WACC is __% round to one decimal.

5. Starware Software was founded last year to develop software for gaming applications. The founder initially invested $700,000 and received 10 million shares of stock. Starware now needs to raise a second round of capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $1.20 million and wants to own 10% of the company after the investment is completed.

a. How many shares must the venture capitalist receive to end up with 10% of the company? What is the implied price per share of this funding round?
b. What will the value of the whole firm be after this investment ( the post-money valuation)?

6. Three years ago, you founded Outdoor Recreation, Inc, a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds:

Round Date Investor Shares Share Price $
Series A 2/2005 You 400,000 0.50
Series B 8/2005 Angels 1,100,000 1.50
Series C 9/2007 Venture Cap 2,100,000 3.25

It is now 2008 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IPO. You would like to issue an additional 6.0 million new shares through this IPO. Assuming that your firm successfully completes its IPO, you forecast the 2008 net income will be $7.0 million.

a. Your investment banker advises you that the prices of other recent IPOs have been set such that the P/E ratios based on 2008 forecasted earnings average 20.0. Assuming that your IPO is set at a price that implies a similar multiple, what will your IPO price per share be?

b. What percent of the firm will you own after the IPO?

Solution Summary

WACC balance sheet liabilities and equity is determined.