Reference no: EM132487375
Examine the following book-value balance sheet for University Products, Inc.
Assets
Cash and short-term securities $1
Accounts receivable 3
Inventories 7
Plant and equipment 21
Total $32
Liabilities and Net Worth
Bonds, coupon = 8%, paid annually (maturity = 10 years, current yield to maturity = 9%) $10
Preferred stock (par value $20 per share) 2
Common stock 10
Retained earnings 10
Total $32
- The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are one million common shares outstanding.
Dollars Percent
Bonds 9.36 million 30.33%
Preferred Stock 1.50 million 4.86%
Common Stock 20.00 million 64.81%
Total 30.86 million 100.00%
Question 1: If the preferred stock pays a dividend of $2 per share, the beta of the common stock is 1.5, the market risk premium is 7%, the risk-free rate is 4%, and the firm's tax rate is 40%, what is University's weighted-average cost of capital?
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