Slick Enterprises has the following capital structure: Loans, 9% $100,000 Loans, 12% 100,000 Accounts payable 200,000 Mortgage, 8% 400,000 -------- Total liabilities $800,000 Common stock 100,000 -------- Total liability & equity $900,000 Accounts payable that are over 30 days old incur a cost of 1.5% per month. About half the accounts are older than 30 days. Common stock has a market price of $15 and earnings per share of $3.50 after taxes, of which $1.50 is paid as dividends. (a) Obtain a weighted average cost of capital, assuming a marginal tax rate of 40%. (b) Is your numerical answer in part (a) a good value to use for MARR? Explain.
Slick Enterprises has the following capital structure:
Loans, 9% $100,000
Loans, 12% 100,000
Accounts payable 200,000
Mortgage, 8% 400,000
--------
Total liabilities $800,000
Common stock 100,000
--------
Total liability & equity $900,000
Accounts payable that are over 30 days old incur a cost of 1.5% per month. About half the accounts are older than 30 days. Common stock has a market price of $15 and earnings per share of $3.50 after taxes, of which $1.50 is paid as dividends.
(a) Obtain a weighted average cost of capital, assuming a marginal tax rate of 40%.
(b) Is your numerical answer in part (a) a good value to use for MARR? Explain.
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