CMA Study Group

 View Only

  • 1.  wacc

    Posted 01-30-2019 07:31 PM
    K Corporation's capital structure includes $2,000,000 face value of 8%, 20-year bonds with a current market price of $102. The company also has 300,000 shares of common stock outstanding with a current market price of $26 per share. JK's cost of equity capital is estimated at 11%, and it is subject to a 25% tax rate. Calculate JK Corporation's percentage (weight) of equity to use in calculating the weighted average cost of capital.
    79.6%
    78.0%
    22%
    20.4%

    Correct. The market value of the bonds equals $2,000,000 × 110% = $2,200,000. The market value of the equity = 300,000 shares × $26 = $7,800,000, with debt plus equity totaling $2,200,000 = $7,800,000 = $10,000,000. The percentage of equity = $7,800,000 ÷ $10,000,000 = 78%.

    any one know what is 110% is any how he calculate it  
    thanks

    ------------------------------
    Abdallah Abu Khaled
    Student
    ------------------------------


  • 2.  RE: wacc

    Posted 02-03-2019 10:32 AM
    I don't know - I would think the 110% should be 102%...I'm coming up with 79.6% as the answer:
    Bonds:  $2,000,000 / $100 par = 20,000 bonds * market price of $102 =  $2,040,000
    Equity: 300,000 shares * $26 market price = $7,800,000
    Weight of equity = 7,800,000/ (2,040,000 + 7,800,000)
    Answer: .7926 (rounded to 79.6%)

    Am I missing something too?

    ------------------------------
    Leigh Dishman
    Accountant
    Plano TX
    United States
    ------------------------------

    Original Message


  • 3.  RE: wacc

    Posted 02-18-2019 09:23 PM
    I think the bond value is 2,160,000.00  (2,000,000 x 8%). However, being that the bond is worth a premium on the market, we would need to find what the premium is and then add it to the value.

    ------------------------------
    Natasha Whittle
    Administrative
    Sunrise FL
    United States
    ------------------------------

    Original Message