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Old 11-24-2008, 07:12 PM   #1
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WACC problem, with a twist need help!

Given the following information:
LEFT SIDE:
Cash and marketable securities 1500
A/R 120,000
Inventories 125,000
Current Assets 246,500
PP&E 302,000
Other assets 89,000
Total 637,500

RIGHT SIDE:
short-term debt 75600
A/P 62000
Current Lib 137600
Long term debt 208600
Deferred taxes 246,000
Total 637,500



calculate this company's WACC. Some guidelines: i)Ignore deferred taxes; this is an accounting entry and represents neither a liability nor a source of funds ii) ‘Net out’ accounts payable against current assets, i.e. don't calculate a cost for these. iii) The book values of Renselear Felt's debts are close to their market values. Choose the closest response.

"The debt has just been refinanced at an interest rate of 6% (short-term) and 8% (long term). The expected rate of return on the company shares is 15%. There are 7.46 million shares outstanding, and the shares are trading at $46. The tax rate is 35%

a. 9.0%
b. 10.0%
c. 11.0%
d. 12.0%
e. 13.0%

Last edited by rzajr21; 11-24-2008 at 07:26 PM.
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Old 11-24-2008, 07:17 PM   #2
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Re: WACC problem, with a twist need help!

don't you need some cost of debt and cost of equity figures to calculate WACC?

strange that there's no equity.............. isn't cost of capital usually based on market value? and i don't see any here.
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Old 11-24-2008, 07:25 PM   #3
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Re: WACC problem, with a twist need help!

Quote:
Originally Posted by smbruin22 View Post
don't you need some cost of debt and cost of equity figures to calculate WACC?

strange that there's no equity.............. isn't cost of capital usually based on market value? and i don't see any here.
This.

Not to mention that the balance sheet doesn't balance... this is a very unique twist, I must say!
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Old 11-24-2008, 07:25 PM   #4
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Re: WACC problem, with a twist need help!

Quote:
Originally Posted by smbruin22 View Post
don't you need some cost of debt and cost of equity figures to calculate WACC?

strange that there's no equity.............. isn't cost of capital usually based on market value? and i don't see any here.
Wow you are right I forgot to include some information that is from the book.

"The debt has just been refinanced at an interest rate of 6% (short-term) and 8% (long term). The expected rate of return on the company shares is 15%. There are 7.46 million shares outstanding, and the shares are trading at $46. The tax rate is 35%
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Old 11-24-2008, 07:27 PM   #5
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Re: WACC problem, with a twist need help!

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Originally Posted by Wizard of Raise View Post
This.

Not to mention that the balance sheet doesn't balance... this is a very unique twist, I must say!
Sorry that was a type-o that I made, my mistake. I have this homework due tonight and I flew past the first 20 questions and the last 2 are giving me trouble. Would appreciate it if someone could break this down for me.

Thanks.
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Old 11-24-2008, 07:29 PM   #6
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Re: WACC problem, with a twist need help!

Quote:
Originally Posted by Wizard of Raise View Post
This.

Not to mention that the balance sheet doesn't balance... this is a very unique twist, I must say!
i thought same thing. but i think it balances as you're adding basic items to categories. but i found it confusing and couldn't figure it out.... so i think it balances. EDIT: sorry, you right it didn't balance

but i think the OP needed more info, which he has now provided. not sure what the twist is if you use market value for equity and book value for debt (close enough to market value in many cases)
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Old 11-24-2008, 07:36 PM   #7
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Re: WACC problem, with a twist need help!

I twist is I don't get this problem. =)

Also those Book value numbers are in thousands.

Last edited by rzajr21; 11-24-2008 at 08:06 PM.
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Old 11-24-2008, 07:43 PM   #8
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Re: WACC problem, with a twist need help!

i think you calculate the after-tax cost of the short and long term debt and then take weighted average cost of the STD, LTD (both BV) and equity(MV)... would of course help if i was taking the course.
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Old 11-24-2008, 08:05 PM   #9
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Re: WACC problem, with a twist need help!

Seems like I am not getting the right answer.

I have WACC = (85%)(1-65%)(264469/607629) + (15%)(343160/607629)

I get 32% I think my D/V and E/V numbers are skewed somewhere.
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Old 11-24-2008, 09:11 PM   #10
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Re: WACC problem, with a twist need help!

Quote:
Originally Posted by rzajr21 View Post
Seems like I am not getting the right answer.

I have WACC = (85%)(1-65%)(264469/607629) + (15%)(343160/607629)

I get 32% I think my D/V and E/V numbers are skewed somewhere.
a few things..........

1) needs to be 3 steps not 2 steps. short-term and long-term debt are different cost.

2) (1-65%). assume there should be a decimal point in there. but also, it would be (1-0.35%) assuming you could do the debt all as one step.

3) MOST IMPORTANTLY, AND THE REASON YOUR ANSWER IS SO FAR OFF.... THE FIRST TERM ASSUMING YOU COULD DO THE DEBT ALL IN ONE STEP WOULD BE... 85% X 65% X PRE-TAX INTEREST COST. THAT 264469/607629 IS WAY OFF... PERCENT DEBT X TAX FACTOR X INTEREST COST.

hope that helps.... that 264469/607629 is the reason your answer is way off
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Old 11-24-2008, 09:41 PM   #11
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Re: WACC problem, with a twist need help!

Quote:
Originally Posted by smbruin22 View Post
a few things..........

1) needs to be 3 steps not 2 steps. short-term and long-term debt are different cost.

2) (1-65%). assume there should be a decimal point in there. but also, it would be (1-0.35%) assuming you could do the debt all as one step.

3) MOST IMPORTANTLY, AND THE REASON YOUR ANSWER IS SO FAR OFF.... THE FIRST TERM ASSUMING YOU COULD DO THE DEBT ALL IN ONE STEP WOULD BE... 85% X 65% X PRE-TAX INTEREST COST. THAT 264469/607629 IS WAY OFF... PERCENT DEBT X TAX FACTOR X INTEREST COST.

hope that helps.... that 264469/607629 is the reason your answer is way off
I added up the debt by multiplying the short term by the ST interest rate and adding this number to the long term debt times the LT interest rate. Isnt that what you do?
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Old 11-24-2008, 09:51 PM   #12
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Re: WACC problem, with a twist need help!

isn't this standard from the textbook??

assuming the debt could be taken as one....

the calc.

% debt of total capital TIMES after-tax cost of debt........ after-tax cost of debt = 65% x debt cost.
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Old 11-24-2008, 10:09 PM   #13
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Re: WACC problem, with a twist need help!

of pre-tax after-tax WACC
Amount capital costs costs
STD 75.6 13.4% 6.0% 3.9% 0.5%
LTD 137.6 24.4% 8.0% 5.2% 1.3%
EQY - MKT 349.6 62.1% 15.0% 15.0% 9.3%

562.8 11.1%

11.1%... columns are amount of capital, percent of capital, pre-tax cost, after-tax cost, contribution to WACC.
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Old 11-24-2008, 11:10 PM   #14
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Re: WACC problem, with a twist need help!

bruin thanks for the help I pretty much get it now.
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Old 11-25-2008, 02:21 AM   #15
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Re: WACC problem, with a twist need help!

Jesus christ, your final is gonna be a bloodbath..
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