A fitness equipment manufacturer is capitalized with long-term debt, preferred stock and common stock. The amount and cost of each capital source is in the table below. The cost of debt is the after-tax cost. What is the firm's weighted average cost of capital? (round to two decimal places) Amount ($) Cost (%) Long-term debt Preferred stock 800,000 4% 350,000 5% Common stock 3,900,000 5,050,000 8% Total

A fitness equipment manufacturer is capitalized with long-term debt, preferred stock and common stock. The amount and cost of each capital source is in the table below. The cost of debt is the after-tax cost. What is the firm's weighted average cost of capital? (round to two decimal places) Amount ($) Cost (%) Long-term debt Preferred stock 800,000 4% 350,000 5% Common stock 3,900,000 5,050,000 8% Total

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section9.8: The Weighted Average Cost Of Capital (wacc)

Problem 3ST

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As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2014, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.
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A fitness equipment manufacturer is capitalized with long-term debt, preferred stock in common stock. The amount and cost of each capital sources in the table below. The cost of that is the after-tax cost. What is the firms weighted average cost of capital? (round to decimal places) Amount ($) cost (%) Long term debt 800,000 4% Preferredstock 350,000 5% Common stock 3,900,000 8%