The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as follows: Cash and marketable € 76,600 Short-term debt 2,500 securities 63,000 € 139,600 Accounts receivable 121,000 126,000 Accounts payable Inventory Current liabilities € 249,500 Current assets Property, plant, and equipment 209,600 213,000 Long-term debt 46,000 88,000 Deferred taxes Shareholders' equity 247,300 Other assets € 596,500 € 596,500 Total Total The debt has an interest rate of 3.50% (short term) and 5.50% (long term). The expected rate of return on the company's shares is 12.50%. There are 7.56 million shares outstanding, and the shares are trading at €56. The tax rate is 25%. Assume the company issues 50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure. a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) 96
The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as follows: Cash and marketable € 76,600 Short-term debt 2,500 securities 63,000 € 139,600 Accounts receivable 121,000 126,000 Accounts payable Inventory Current liabilities € 249,500 Current assets Property, plant, and equipment 209,600 213,000 Long-term debt 46,000 88,000 Deferred taxes Shareholders' equity 247,300 Other assets € 596,500 € 596,500 Total Total The debt has an interest rate of 3.50% (short term) and 5.50% (long term). The expected rate of return on the company's shares is 12.50%. There are 7.56 million shares outstanding, and the shares are trading at €56. The tax rate is 25%. Assume the company issues 50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure. a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) 96
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as follows:
Cash and marketable
€ 76,600
Short-term debt
2,500
securities
63,000
€ 139,600
Accounts receivable
121,000
126,000
Accounts payable
Inventory
Current liabilities
€ 249,500
Current assets
Property, plant, and
equipment
209,600
213,000
Long-term debt
46,000
88,000
Deferred taxes
Shareholders' equity
247,300
Other assets
€ 596,500
€ 596,500
Total
Total
The debt has an interest rate of 3.50% (short term) and 5.50% (long term). The expected rate of return on the company's shares is
12.50%. There are 7.56 million shares outstanding, and the shares are trading at €56. The tax rate is 25%. Assume the company issues
50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged
and the short-term debt is permanent. Use the three-step procedure.
a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
Cost of equity
b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
96
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