Calculate wacc based on both book value and market value

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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

Reference no: EM13202322

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