I am reviewing for my Professional Engineering License and need assistance in studying for the Engineering Economy portion of the exam. I am studying this study guide and all it does is provide the answers to the problems. I need the in between steps. I am not quite sure how to set the attached problems up from chapter 9. Will you set the problems up for me and provide a synopsis of the logic behind the problem's solution or steps in order to do so?
#1. The debt ratio is 50/125 = 40%
The equity ratio is 75/125 = 60%
The WACC formula is
(1-Tc)(D/V x Rd) + E/V x Re)
where E denotes the value of the firm's equity and D the value firm's debt, while V is the sum E+D. So E/V and D/V are just the proportions of equity and debt, respectively, in the sum of equity and debt. Re is the cost of equity, and Rd is the cost of debt. Substituting these number we have:
= (1-.35)(50/125 x .089) + (75/125 x .146) = .1084 = 10.84%
#3. The total value of the firm equals the value of its debt plus preferred plus common.
The market value of equity is given to you as $16,182 million. If you weren't you would calculate it thus:
? Common Stock = Stock price * Actual Number of shares ...