question archive Anson Jackson Court Company (AJC) The Anson Jackson Court (AJC) currently has $150,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%
Anson Jackson Court Company (AJC) The Anson Jackson Court (AJC) currently has $150,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%
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Anson Jackson Court Company (AJC) The Anson Jackson Court (AJC) currently has $150,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $89,000, and it is a zero growth company. AJC's current cost of equity is 10%, and its tax rate is 25%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Refer to the data for the Anson Jackson Court Company (AJC). What is AJC's current total market value and weighted average cost of capital? Total Market Value; WACC
a. $750,000; 8.4%
b. $650,000; 9.4%
c. $650,000; 8.9%
d. $750,000; 8.9%
e. $750,000; 9.4%
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Answer:
| A. Current Total Market Value | ||||||||||
| Current market value of debt | $1,50,000.00 | |||||||||
| Current market value of equity | $6,00,000.00 | |||||||||
| ( no.of shares * market price ) | ||||||||||
| 10,000 Shares*$60 | ||||||||||
| Market Value | $7,50,000 | |||||||||
| B. Weighted Average Cost of Capital (WACC) | ||||||||||
| Dollar Valuation Method | ||||||||||
| Equity | $6,00,000.00 | |||||||||
| Debt | $1,50,000.00 | |||||||||
| Cost of Equity | 10% | |||||||||
| Cost of Debt | 6% | |||||||||
| Tax rate | 25% | |||||||||
| WACC = | {Equity / (Equity + Debt) * Cost of Equity } +{ Debt / ( Equity + Debt ) * Cost of Debt * (1 - 25%)} | |||||||||
| = | {$6,00,000/($6,00,000+$1,50,000)*10%} + {$1,50,000/($6,00,000+$1,50,000)*6%*0.75} | |||||||||
| = | $6,00,000 | *10% + | $1,50,000 | *6%*0.75 | ||||||
| $7,50,000 | $7,50,000 | |||||||||
| = | 0.08 + 0.009 | |||||||||
| = | 8.90% | |||||||||
| Option D : $7,50,000 ; 8.90% | ||||||||||
