1530 Words7 Pages

FINANCE
CASE STUDY “Wonder Bars”
Important information
* Interest bearing debt of the company in 1994 ― $ 76,132,000 with a weighted average interest rate of 8.2%
8.25% sinking fund, n=12 years, $133 million
* Coupon interest = 9.375%, $100 million
WB had two long term bond outstanding
Common stock, 75 million shares
* Class B stock, $10 million shares
The firm has 2 classes of common stocks
Both stock have a price of 35$ / share and the beta of the company is 0.95
* Treasury bill = 5% * S&P 500 index = 12% in 10 years * Federal and state income tax = 40% * Sonzoni Food beta = 0.9
SOLUTION Question 1: What is WB’s capital structure?
Capital structure is a way to determine*…show more content…*

The total of the above vales gives us the total capital of the company $309.132 million + $2,975 million = $3,284. 132 million Wdebt = debt/ (debt + equity) = $309,132 million/$3,284. 132 million= 0.094 (9.4%) Wequity= equity/ (debt + equity) = $2,975 million/$3,284. 132 million= 0.906 (90.6%) QUESTION 2: What is WB’s before-tax cost of long-term debt? Firm has only two long term debt, which are specifically the two bonds issued. To find the before tax cost of long term debt, there are two different way which can prove the same results. Let’s start by calculating each of them one by one: 1. A) before tax cost of debt for the first bond = 8.25% x $133 million = $10,972,500 B) After tax cost of debt: i x (1- tax*) = 8.25% x (1- 0.3879) = 0.050498 $133million x 0.050498 = $6,716,234 ―» before tax cost of debt: $6,716,234/ (1- 0.3879) = $10,972,445 or approximately $10,972,500 2. A) Before tax cost for the second bond = 9.375% x $100 million = $9,375,000 B) After tax cost of debt: 9.375% (1- 0.3879*) =0.05738 0.05738 x $100million = $5,738,000 ―» before tax cost of debt = $5,738,000/ (1- 0.3879) = $9,374,300 or approximately*…show more content…*

Both these should be in percentage. The costs taken into consideration in the formula should be the costs after the tax. We already calculated this cost at the second question, but only for the long term debt. So now we will calculate it for the short term interest bearing debt, $76,132,000, the formula used in the calculation is the same as in question 2. The result is this one: 0.082 (1-0.3879) = 0.05019. The other after tax costs are 0.050498 and 0.05738, respectively for $133 million bond and $100million bond. From the information taken above we conclude that the Cost of total debt = (0.05738 + 0.050498 + 0.05019) / 3 = 0.0526 (5.26%) Cost of the equity, we calculated on question nr 3, and it is 17.6525 %. To sum up, the cost of the capital is nothing more than the sum of the cost of equity and cost of debt, the calculation is this: Cost of capital = 17.6525 % + 5.26% = 22.91 % QUESTION 5: If Wonder Bar uses book value rather than market value to determine its capital structure, what is the impact of the cost of capital on its budgeting decisions? Market value is simply the amount of money that people are willing to pay for a stock. To figure out the market value of a stock, we need to look at the current price that the stock is trading for in the

The total of the above vales gives us the total capital of the company $309.132 million + $2,975 million = $3,284. 132 million Wdebt = debt/ (debt + equity) = $309,132 million/$3,284. 132 million= 0.094 (9.4%) Wequity= equity/ (debt + equity) = $2,975 million/$3,284. 132 million= 0.906 (90.6%) QUESTION 2: What is WB’s before-tax cost of long-term debt? Firm has only two long term debt, which are specifically the two bonds issued. To find the before tax cost of long term debt, there are two different way which can prove the same results. Let’s start by calculating each of them one by one: 1. A) before tax cost of debt for the first bond = 8.25% x $133 million = $10,972,500 B) After tax cost of debt: i x (1- tax*) = 8.25% x (1- 0.3879) = 0.050498 $133million x 0.050498 = $6,716,234 ―» before tax cost of debt: $6,716,234/ (1- 0.3879) = $10,972,445 or approximately $10,972,500 2. A) Before tax cost for the second bond = 9.375% x $100 million = $9,375,000 B) After tax cost of debt: 9.375% (1- 0.3879*) =0.05738 0.05738 x $100million = $5,738,000 ―» before tax cost of debt = $5,738,000/ (1- 0.3879) = $9,374,300 or approximately

Both these should be in percentage. The costs taken into consideration in the formula should be the costs after the tax. We already calculated this cost at the second question, but only for the long term debt. So now we will calculate it for the short term interest bearing debt, $76,132,000, the formula used in the calculation is the same as in question 2. The result is this one: 0.082 (1-0.3879) = 0.05019. The other after tax costs are 0.050498 and 0.05738, respectively for $133 million bond and $100million bond. From the information taken above we conclude that the Cost of total debt = (0.05738 + 0.050498 + 0.05019) / 3 = 0.0526 (5.26%) Cost of the equity, we calculated on question nr 3, and it is 17.6525 %. To sum up, the cost of the capital is nothing more than the sum of the cost of equity and cost of debt, the calculation is this: Cost of capital = 17.6525 % + 5.26% = 22.91 % QUESTION 5: If Wonder Bar uses book value rather than market value to determine its capital structure, what is the impact of the cost of capital on its budgeting decisions? Market value is simply the amount of money that people are willing to pay for a stock. To figure out the market value of a stock, we need to look at the current price that the stock is trading for in the

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