Reference no: EM13202322

The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011:

Balance Sheet			2010		2011
Cash			$50,000		$40,000
Accounts receivable			200,000		260,000
Inventory			450,000		500,000
Total current assets			700,000		800,000
Fixed assets (net)			300,000		400,000
Total assets			$1,000,000		$1,200,000
Bank loan, 10%			$90,000		$90,000
Accounts payable			130,000		170,000
Accruals			50,000		70,000
Total current liabilities			$270,000		$330,000
Long-term debt, 12%			300,000		400,000
Common stock, $10 par			300,000		300,000
Capital surplus			50,000		50,000
Retained earnings			80,000		120,000
Total liabilities and equity			$1,000,000		$1,200,000

a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax of new debt of 8.63 percent and a cost of common equity of 16.5 percent.

Cost of equity			16.50%		Component			Book value
After Tax Cost of debt			8.63%
2010					Long term debt			300,000
								1,130,000
								1,430,000

b. The current market value of Genatron's long-term debt is $350,000. The common stock price is $20 per share and there are 30,000 shares outstanding. Calculate the WACC

c. Re-calculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt will be 18 percent, the company is in the 40 percent