Why is it important to use market-based weights

Reference no: EM133491883

Case: The following information is extracted from Farm Fresh LTD.

Per the company's financial records, they have $3,000,000 in bonds (Face value). The agreed coupon payment is 9% per annum, and the before-tax yield to maturity is 8%. This bond is selling at $115 per share, and the face value of each bond is $100.

The company has 46,000 outstanding Ordinary shares, and currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 4% growth rate in dividends, which it expects to continue indefinitely.

The firm's marginal tax rate is 30%. The company has no plans to issue new securities.

Question 1 Calculate the current total market value of the firm.

Question 2 Calculate the weighted average cost of capital (WACC) for the firm

Question 3 Why is it important to use market-based weights rather than balance sheet weights when estimating a company's weighted average cost of capital?

Question 4 Why would it be inappropriate for the company's management to use the WACC calculated above for the evaluation of a new project with different risks from the current projects

Reference no: EM133491883

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