Problems -

1. As price changes are constant in the economy there will be changes in the value of inventory according to price fluctuations. Inventories are priced on financial statements either at cost value or market value (whichever is lower).

As inventory is a current asset they are shown in the balance sheet and their value as on the date of the balance sheet is determined either on the basis of cost value or on the basis of market value. Cost refers to the historical cost while market value or market price means current replacement costs.

Now total inventory value changes on a continuous basis as a firm buys materials and sells finished goods. We report that value on the balance sheet that stands on the date of the balance sheet.

The following formula is used to find the ending value of inventory: ending value = beginning value+net purchases - cost of goods sold. Different methods can be used to compute the cost of goods sold. The methods are LIFO, FIFO and average cost method.

2. Diddy Corp stock has a beta of 1.2, the current risk-free rate is 5 percent, and the expected return on the market is 13.5 percent. What is Diddy's cost of equity?

Oberon Inc. has a $20 million (face value) bond issue selling for 97 percent of par that pays an annual coupon of 8.25 percent. What would be Oberon's before-tax component cost of debt?

ILK has preferred stock selling for 97 percent of par that pays an 8 percent annual coupon. What would be ILK's component cost of preferred stock?

FarCry Industries, a maker of telecommunications equipment, has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred share are selling for $14.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of FarCry's WACC?

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5 thousand bonds. If the common shares are selling for $17 per share, the preferred share are selling for $26 per share, and the bonds are selling for 108 percent of par, what would be the weight used for equity in the computation of OMG's WACC?

Suppose that TapDance, Inc.'s capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. If the appropriate weighted average tax rate is 34 percent, what will be TapDance's WACC?