Here is the considered 2011 balance sheet for Skye Computer Company (

QUESTION

Here is the considered 2011 balance sheet for Skye Computer Company ( in thousands of dollars):Current Assets: 2000; Net Fixed Assets: 3000; Total Assets; 5000.Current liabilities: 900; long term debt: 1200; Preferred stock(10000 shares): 250; common stock (50000 shares): 1300; retained earnings: 13¦
Cost of common equity from retained earnings: Cost of common equity(DCF) = Currnet year dividend/Market price Growth rate Current year dividend is = Last year dividend*(1 g) = $2.10*(1 0.09) = $2.10*(1.09) = $2.289 Cost of common equity = $2.289/$55 0.09 = 0.0416 0.09 = 0.01316 =13.16% Cost of newly issued common stock: For calculating newly issued common stock, here we have to deduct the Flotation charges. Flotation charges are 10% on market price of the common stock. Flotation charges = 10%*$55 = $5.5 New market price is = $55 “ $5.5 =$49.5 Cost of newly issued common stock = $2.289/$49.5 0.09 = 0.0462 0.09 = 0.1362 = 13.62% Cost of preferred stock: Cost of preferred stock = Preferred dividend/Market price of preferred stock = $3.30/$30 = 0.11 = 11% Cost of debt: Here, cost of debt before taxes is 10%. Cost of debt after taxes = Cost of debt before taxes*(1-tax rate) =¦

) = 10%*0.65 = 6.5% Therefore cost of debt after-taxes is 6.5% Calulation of WACC: WACC = Cost of debt after-taxes*Propotion of debt Cost of equity*propotion of equity Cost of preferred stock*propotion of preferred stock Market value of total debt, equity and preferred stock = 500 Proportion of debt = Value of debt/Total value of firm = 1200/5000 = 0.24 Proportion of equity = Value of equity/Total value of firm = 2650/5000 = 0.53 Proportion of preferred stock = Value of preferred stock/Total value of firm = 250/5000 = 0.05 WACC = 6.5%*0.24 13.62%*0.53 11%*0.05 = 1.56% 7.2186% 0.55% =9.3286%

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