Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 9, Problem 9.13P
WACC: Market value weights The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table.
| Source of capital | Market value | Individual cost |
| Long-term debt | $700,000 | 5.3% |
| 50,000 | 12.0 | |
| Common stock equity | 650,000 | 16.0 |
- a. Calculate the firm’s WACC.
- b. Explain how the firm can use this cost in the investment decision-making process.
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WACC-Market value weights The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table:
a. Calculate the firm's weighted average cost of capital.
b. Explain how the firm can use this cost in the investment decision-making process.
a. The firm's weighted average cost of capital, ra, using market value weights is %. (Round to two decimal places.)
Data Table
(Click on the icon located on the top-right corner of the data table below in order to
copy its contents into a spreadsheet.)
Source of capital
Market value
Individual cost
$700,000
$30,000
$600,000
Long-term debt
6.2%
Preferred stock
11.9%
Common stock equity
16.5%
Print
Done
Source of capital
Long-term debt
Preferred stock
Common stock equity
Market value
$700,000
$70,000
$400,000
Individual cost
7.6%
12.4%
14.8%
The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table. Source of capital Market value Individual cost Long-term debt $700,000 5.3% Preferred stock 50,000 12.0 Common stock equity 650,000 16.0 a. Calculate the firm’s WACC. b. Explain how the firm can use this cost in the investment decision-making process. Please show your work.
Chapter 9 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 9.1 - Prob. 1FOECh. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQCh. 9.1 - Prob. 9.3RQCh. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQCh. 9.2 - Prob. 9.6RQCh. 9.2 - Prob. 9.7RQCh. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...
Ch. 9.4 - How do the constant-growth valuation model and...Ch. 9.4 - Why is the cost of financing a project with...Ch. 9.5 - Prob. 1FOPCh. 9.5 - Prob. 9.13RQCh. 9.5 - Prob. 9.14RQCh. 9.5 - Prob. 9.15RQCh. 9 - Prob. 1ORCh. 9 - Learning Goals 3, 4, 5, 6 ST9-1 Individual...Ch. 9 - Prob. 9.1WUECh. 9 - Prob. 9.2WUECh. 9 - Prob. 9.3WUECh. 9 - Weekend Warriors Inc. has 35% debt and 65% equity...Ch. 9 - Oxy Corporation uses debt, preferred stock, and...Ch. 9 - Prob. 9.1PCh. 9 - Prob. 9.2PCh. 9 - Prob. 9.3PCh. 9 - Prob. 9.4PCh. 9 - The cost of debt Gronseth Drywall Systems Inc. is...Ch. 9 - After-tax cost of debt Bella Wans is interested in...Ch. 9 - Prob. 9.7PCh. 9 - Cost of preferred stock Determine the cost for...Ch. 9 - Prob. 9.9PCh. 9 - Prob. 9.10PCh. 9 - Retained earnings versus new common stock Using...Ch. 9 - The effect of tax rate on WACC K. Bell Jewelers...Ch. 9 - WACC: Market value weights The market values and...Ch. 9 - WACC: Book weights and market weights Webster...Ch. 9 - Prob. 9.15PCh. 9 - Cost of capital Edna Recording Studios Inc....Ch. 9 - Prob. 9.17PCh. 9 - Prob. 9.18PCh. 9 - Calculation of individual costs and WACC Lang...Ch. 9 - Weighted average cost of capital (WACC) American...Ch. 9 - Prob. 9.21PCh. 9 - Eco Plastics Company Since its inception, Eco...
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- Defining capital investment terms Fill in each statement with the appropriate capital investment analysis method: Payback, ARR, NPV, or IRR. Some statements may have more than one answer. __________ is(are) more appropriate for long-term investments. __________ highlights risky investments. ____________ shows the effect of the investment on the company’s accrual-based income. ___________ is the interest rate that makes the NPV of an investment equal to zero. __________ requires management to identify the discount rate when used. _________ provides management with information on how fast the cash invested will be recouped ___________ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset. __________ does not consider the asset’s profitability __________ uses accrual accounting rather than net cash inflows in its computation.arrow_forwardWeighted Average Cost of Capital (WACC) theory suggests there is an optimal capital structure. Discuss this statement to include an explanation of: What is meant by ‘capital structure’. How changes in capital structure effect WACC The relationship of WACC to the market value of a company The traditional view of the optimum gearing ratio. You may find graphical illustration(s) can support your discussion.arrow_forwardPlease see image to solve question.arrow_forward
- The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if the firm will have to issue new common stock, the cost of new common stock should be used in the firm's WACC calculation. Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 7.4%, the firm's cost of preferred stock, rp, is 6.9% and…arrow_forwardExplain what the weighted average cost of capital for a firm is and why is it often used as a discount rate to evaluate capital projects.arrow_forwardThe capital structure weights used in computing a firm's weighted average cost of capital:Select one:a. Remain constant over time unless the firm issues new securities.b. Are based on the book values of the firm's debt and equity.c. Depend upon the financing obtained to fund each specific project.d. Are based on the market values of the firm's debt and equity securities.e. Are restricted to the firm's debt and common stock.arrow_forward
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