Question

The Anson Jackson Court (AJC) currently has $150,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $89,000, and it is a zero growth company. AJC's current cost of equity is 10%, and its tax rate is 25%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Refer to the data for the Anson Jackson Court Company (AJC). What is AJC's current total market value and weighted average cost of capital? Total Market Value; WACC

a. $750,000; 8.4%
b. $650,000; 9.4%
c. $650,000; 8.9%
d. $750,000; 8.9%
e. $750,000; 9.4%

Answer 1

Answer:

d. $750,000; 8.9%

Explanation:

The computation is shown below:

A. Current Total Market Value          

Current market value of debt $150,000         The  Current market value of equity $600,000 (10,000 shares × $60)      Market Value  $750,000        

B. Weighted Average Cost of Capital (WACC)         WACC = {Equity ÷ (Equity + Debt) × Cost of Equity} + {Debt ÷ ( Equity + Debt ) × Cost of Debt × (1 - 25%)}

= {$600,000 ÷ ($600,000 + $150,000) × 10%}  + {$150,000 ÷ ($600,000 + $150,000) × 6% × 0.75}  

= ($600,000 ÷ $750,000) × 10% + ($150,000 ÷ $750,000) × 6% × 0.75            = 0.08 + 0.009          

= 8.90%          

Hence, the correct option is D. $7,50,000 ; 8.90%