60.1K

Verified Solution

Link Copied!

Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):

	2021
Current assets		$	1,750
Net fixed assets			3,250
Total assets		$	5,000
Accounts payable and accruals		$	600
Short-term debt			100
Long-term debt			1,850
Preferred stock (10,000 shares)			300
Common stock (50,000 shares)			1,050
Retained earnings			1,100
Total common equity		$	2,150
Total liabilities and equity		$	5,000

Skye's earnings per share last year were $4.10. The common stock sells for $45.00, last year's dividend (D₀) was $3.40, and a flotation cost of 9% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye's preferred stock pays a dividend of $4.20 per share, and its preferred stock sells for $35.00 per share. The firm's before-tax cost of debt is 11%, and its marginal tax rate is 25%. The firm's currently outstanding 11% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.312. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.95 million.

C) What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r_e and r_s as determined by the DCF method, and add that differential to the CAPM value for r_s.)

_______%

D) If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)

WACC₁: ______%

WACC₂: -______ %

Answer & Explanation Solved by verified expert

See Answer