Calculate the weighted average cost, Financial Accounting

The following information is available about the capital structure of Cheng & Davis Development (CDD).

Capital Structure




Book Value

Market Value

Book Value

Market Value











(a)    What transaction(s) in the capital market would CDD have to conduct to achieve its capital structure, without raising any net new capital?

(b)   The equity beta of CDD's stock, estimated from recent data, is 0.8. What is the asset beta? Assume for this part that the beta of debt is approximately zero.

(c)    If CDD were to change its capital structure towards its target proportions, how would this affect the equity beta of the company? Assume for this part that the beta of debt is approximately zero.

Consider the following information about market interest rates and taxes:

1-year risk free rate


30-year risk free rate


Market risk premium


Corporate tax rate (including state taxes)


Yield on long-term CDD bonds


(d)   Calculate the weighted average cost of capital (WACC) that you would use to value CDD as a stand-alone company. Assume henceforth that CDD has achieved its target capital structure, without raising any net new capital.

(e)    Would you also use the cost of capital calculated under (d) to evaluate whether the management team of Karolyn Cheng and Kimberly Davis delivered value over the next year? If not, what change do you recommend? Explain your calculations.

(f)    Based on your answer under (e): if next year's EBIT is 400, what is the economic income delivered by Karolyn and Kimberly?

Posted Date: 2/28/2013 12:08:26 AM | Location : United States

Related Discussions:- Calculate the weighted average cost, Assignment Help, Ask Question on Calculate the weighted average cost, Get Answer, Expert's Help, Calculate the weighted average cost Discussions

Write discussion on Calculate the weighted average cost
Your posts are moderated
Related Questions
How do I prepare a partial income statement under each inventory method?

Presentations of Financial Statements The objective is to give guidance regarding the preparation of published financial statements and prescribe the content of the published fin

Cleary, Wasser, and Nolan formed a partnership on January 1, 2010, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) in

You have previously been exposed to the 'Introduction and analysis' of financial statements in previous sections of this course. From now you might have acquired several familiarit

UNREALIZED PROFIT ON CLOSING INVENTORY Where one company has bought goods from another company in the group and part of these goods are included in the closing inventory, then t

inventory ratio of 4 compared to 7.1

Types of interest given under a will The interest given in a legacy, devise or gift of residue may be of the following kinds:- 1. Vested: A vested interest gives an immedi

A summary of Jarvis Company's December 31, 2013, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group: Age Gro

THE BALANCE SHEET It shows the financial position of the company as at the end of a given financial period. The standard requires that assets and liabilities should be classifi

Prepare an income statement and statement of owner's equity  (month ended Mar,31 1995) Auto remair fee earned            37,300 Salaries Expense                    11500 Repair par