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o The ordinary shares are currently trading at $5.90 per share.
o Government bonds trade at 5%, the return on the market portfolio is 12.50%
o Juanita, Inc.’s beta is 1.25.
o It’s preference shares are trading at $16.50.
o The current return on Juanita debentures is 3.5% above the government bond rate.
o The corporate tax rate is 35%.
o The interest rate on the mortgage was 9.00% at the time of the loan. The mortgage could be refinanced today at 8.00%. It has eight years
remaining.
o The bank overdraft current rate is 10%.
o The commercial bills mature in 120 days. The market interest rate for commercial bills is 6.25%
o Term loans mature in 3 years. Current interest rates are 9.00%. Term loans originally had a 10% interest rate.
o Debentures are due in 10 years
o Interest is paid semi-annually on all Juanita, Inc. debt (Except commercial bills)
o The existing capital structure is unlikely to change.
Task:
1.) Which items should be included when calculating this firm’s WACC?)
2.) Calculate the present value of each capital asset.
3.) Calculate the total present value of the capital assets and the weight of each capital asset used to calculate WACC.
4.) Calculate the WACC
JUANITA, INC.
WACC
COST COST
MARKET WEIGHTED
BASE WEIGHT BEFORE AFTER
VALUE COST
TAX TAX
COMMON SHARE
PREFERRED
SHARE
MORTGAGE
DEBENTURE
BANK
OVERDRAFT
TERM LOANS
TOTAL WACC =