Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells...
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Finance
Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.7. There are 1 million common shares outstanding. The market risk premium is 9%, the risk-free rate is 5%, and the firms tax rate is 21%.
BOOK-VALUE BALANCE SHEET
(Figures in $ millions)
Assets
Liabilities and Net Worth
Cash and short-term securities
$
3.0
Bonds, coupon = 7%, paid annually (maturity = 10 years, current yield to maturity = 9%)
$
10.0
Accounts receivable
5.0
Preferred stock (par value $20 per share)
3.0
Inventories
9.0
Common stock (par value $0.10)
0.1
Plant and equipment
20.0
Additional paid-in stockholders equity
16.9
Retained earnings
7.0
Total
$
37.0
Total
$
37.0
a. What is the market debt-to-value ratio of the firm?
b. What is Universitys WACC?
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