Examine the following book-value balance sheet for University Products, Inc. The preferred stock...

Question

Examine the following book-value balance sheet for University Products, Inc. The preferred stock currently sells for $10 per share and the common stock for $16
 per share.

BOOK VALUE BALANCE SHEET
 (all values in millions)

Assets

Liabilities and Net Worth

Cash and short-term securities

$

2.0

Bonds, coupon = 6%, paid annually
 (maturity = 10 years, current yield to
 maturity = 7%)

$

10.0

Accounts receivable

5.0

Preferred stock (par value $10 per
 share)

1.0

Inventories

9.0

Common stock (par value $0.1)

0.2

Plant and equipment

22.0

Additional paid-in stockholders%u2019 equity

8.8

Retained earnings

18.0

Total

$

38.0

Total

$

38.0

If the preferred stock pays a dividend of $2 per share, the beta of the common stock is 0.2, the market risk premium is 12%, the risk-free rate
 is 8%, and the firm%u2019s tax rate is 30%, what is University%u2019s weighted-average cost of capital? (Do not round
 intermediate calculations. Round your answer to 2 decimal places.)

WACC

%

David · Accepted Answer

Examine the following book-value balance sheet for University Products, Inc. The preferred 
stock currently sells for $10 per share and the common stock for $16 per share.
BOOK VALUE BALANCE SHEET 
(all values in millions) 
Assets Liabilities and Net Worth 
Cash and 
short-term 
securities 
$ 2.0 
Bonds, coupon = 6%, 
paid annually 
(maturity = 10 years, 
current yield to 
maturity = 7%) 
$ 10.0 
Accounts 
receivable  
5.0 
Preferred stock (par 
value $10 per 
share) 
 
1.0 
Inventories 
 
9.0 
Common stock (par 
value $0.1)  
0.2 
Plant and 
equipment  
22.0 
Additional paid-in 
stockholders%u2019 
equity 
 
8.8 
   
Retained earnings 
 
18.0 
 

Total $ 38.0 Total $ 38.

Examine the following book-value balance sheet for University Products, Inc. The preferred stock currently sells for $10 per share and the common stock for $16 per share. BOOK VALUE BALANCE SHEET (all...

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BOOK VALUE BALANCE SHEET (all values in millions)
Assets	Liabilities and Net Worth
Cash and short-term securities	$	2.0	Bonds, coupon = 6%, paid annually (maturity = 10 years, current yield to maturity = 7%)	$	10.0
Accounts receivable	5.0	Preferred stock (par value $10 per share)	1.0
Inventories	9.0	Common stock (par value $0.1)	0.2
Plant and equipment	22.0	Additional paid-in stockholders%u2019 equity	8.8
Retained earnings	18.0

Total	$	38.0	Total	$	38.0