CALCULATING THE WACC Here is the condensed 2018 balance sheet for Skye Computer Company (in thousands of dollars):
2018 | |
Current assets | $2,000 |
Net fixed assets | 3,000 |
Total assets | $5,000 |
Accounts payable and accruals | $ 900 |
Short-term debt | 100 |
Long-term debt | 1,100 |
Preferred stock (10,000 shares) | 250 |
Common stock (50.000 shares) | 1.300 |
Retained earnings | 1,35O |
Total common equity | $2,650 |
Total liabilities and equity | $5,000 |
Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm’s before-tax cost of debt is 10%, and its marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516. The firm s total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million.
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