Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Accounting Expert

Problem: A corporation has the following balance sheet (liabilities side):

Current liabilities                                       $ 2,000
Long- term debt                                          5,000
Preferred stock                                           2,000
Common stock                                            8,000
Retained earnings                                        3,000
$ 20,000

Currently, the riskless interest rate is 8%; corporate tax rate is 50%; the current price of share of common stock is $ 20; and dividends have been level at $ 1 per share per year for numerous years. Recently, company executives have considered growing the existing business by acquiring a competitor. To do so, they should compute the WACC of the firm and estimate the NPV of the acquisition. Because the acquisition is of same risk as the firm, the WACC (unlevered equity cost) can be used. A financial executive has employed the following procedure to compute the WACC. Debt and preferred stock are fixed claims offering a fairly secure stable return, and so there before- tax cost is assumed to equal the riskless rate. The dividend yield has held stable at about 5%; so this is used as the cost of new and retained equity. Finally, the balance sheet shows the firm to be composed of 25% debt, 55% equity, 10% preferred ( common plus retained), and 10% current liabilities. Current liabilities are assumed to be costless; therefore the WACC is 4.55%. Comment on this process.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M94277

Have any Question? 


Related Questions in Financial Accounting

Describe the steps in the exporting process and each of the

Describe the steps in the exporting process and each of the instruments that facilitate exporting. What are export management companies and what are export trading companies? What purposes do they serve and in what way a ...

Capital investment analysisgyro corporation is considering

Capital Investment Analysis Gyro Corporation is considering two investment projects, each of which will cost $1,340,000. The estimated cash flow for each project is as follows. Year Plant Expansion Retail Store Expansion ...

Assignmentpart one working capital analysiscapers inc has

Assignment Part One: Working Capital Analysis Capers, Inc. has just promoted you to Chief financial officer. Since this is a new office in the company, you are understaffed and many of the responsibilities have been assi ...

Assignment financial reporting and analysisyou are required

Assignment: Financial Reporting and Analysis You are required to prepare an investigative report on a recent corporate scandal that involve improper accounting practices or any form of financial scandal. The report must ...

The product life cycle plc is a theory that has strong

The Product Life Cycle (PLC), is a theory that has strong roots in marketing and is a standard for determining the historical development of products and industries from introduction to a presumably eventual decline. Eac ...

Assignemntprepare the 2015 federal tax return for mr herb

Assignemnt Prepare the 2015 Federal Tax Return for Mr. Herb Pu (SS# 576-11-0002) address 123 University Ave., Honolulu, HI 96833 With the following information: · Sold 100 shares of W Corp. for $6,250 on 7/1/15, Purchase ...

Assignmentcomprehensive receivables problem connecticut inc

Assignment (Comprehensive Receivables Problem) Connecticut Inc. had the following long-term receivable account balances at December 31, 2006. Note receivable from sale of division $1,800,000 Note receivable from officer ...

Infrastructure of homeland security hmls 4081 i choose the

Infrastructure of Homeland Security (HMLS 408) 1. I choose The Department Of Energy 2. Parts I and II are to be submitted as one submission, in the form of a continuous document. Make sure to delineate/identify part I an ...

Assignment- cost concepts and types of costing1 given the

Assignment- Cost Concepts and Types of Costing 1. Given the cost formula, Y = $7,000 + $1.80X, what would be the total cost for an activity level of 4,000 units? A. $7,200 B. $7,000 C. $200 D. $14,200 2. In describing th ...

Problem 1on january 1 2010 branson designers issued 900

Problem 1 On January 1, 2010, Branson Designers issued $900 Million of its 8% bonds $836 million. The bonds were then prices to yield 10%. The interest will be payable on June 30 and December 31. Branson records interest ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro