{"id":109373,"date":"2022-12-10T03:54:22","date_gmt":"2022-12-10T03:54:22","guid":{"rendered":"https:\/\/assignmenttutors.net\/blog\/fin-a-corporation-has-the-following-balance-sheet\/"},"modified":"2022-12-10T03:54:22","modified_gmt":"2022-12-10T03:54:22","slug":"fin-a-corporation-has-the-following-balance-sheet","status":"publish","type":"post","link":"https:\/\/assignmenttutors.net\/blog\/fin-a-corporation-has-the-following-balance-sheet\/","title":{"rendered":"Fin &#8211; a corporation has the following balance sheet"},"content":{"rendered":"<div>\n<p><span>A corporation has the following balance sheet (liabilities side): <\/span><br \/><span>Current liabilities $2,000 Rr 8%<\/span><br \/><span>Long term debt $5,000 Tax rate 50%<\/span><br \/><span>Preferred stock $2,000 Stock price $20<span>\u00a0<\/span><\/span><br \/><span>Common stock $8,000 Dividends $1<span>\u00a0<\/span><\/span><br \/><span>Retained earnings $3,000 <\/span><br \/><span>$20,000 <\/span><\/p>\n<p><span>The current riskless rate is 8%; the corporate tax rate is 50%; the current price of a share of common stock is $20 and dividends <\/span><span>have been level at $1 per share per year for many years.<span>\u00a0<\/span><\/span><br \/><span>Recently company executives have considered expanding the existing business by acquiring a competitor. To do so, they must<span>\u00a0<\/span><\/span><span>calculate the WACC of the firm and estimate the NPV of the acquisition. Because the acquisition is of the same risk as the firm,<span>\u00a0 t<\/span><\/span><span>he WACC (unlevered equity cost) can be used. <\/span><\/p>\n<p><span>A financial executive has used the following procedure to calculate the WACC. Debt and preferred stock are fixed claims offering<span>\u00a0<\/span><\/span><span>a fairly secure constant return, and so their before tax cost is assumed to equal the riskless rate.<span>\u00a0<\/span><\/span><span>The dividend yield has held constant at about 5%; so this is used as the cost of new and retained equity. Finally, the\u00a0 <\/span><span>balance sheet shows the firm to be composed of 25% debt, 10% preferred, 55% equity (common plus retained), and 10% current\u00a0 <\/span><span>liabilities. Current liabilities are assumed to be costless; therefore the WACC is 4.55%. Comment on this procedure. <\/span><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A corporation has the following balance sheet (liabilities side): Current liabilities $2,000 Rr 8%Long term debt $5,000 Tax rate 50%Preferred stock $2,000 Stock price $20\u00a0Common stock $8,000 Dividends $1\u00a0Retained earnings $3,000 $20,000 The current riskless rate is 8%; the corporate tax rate is 50%; the current price of a share of common stock is $20 [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-109373","post","type-post","status-publish","format-standard","hentry","category-education"],"_links":{"self":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/109373","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/comments?post=109373"}],"version-history":[{"count":0,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/109373\/revisions"}],"wp:attachment":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/media?parent=109373"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/categories?post=109373"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/tags?post=109373"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}