Glen Mount Furniture, Berkshire Insutruments

Running head : Glen mount Berkshire

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Berkshire instruments company (WACC ) or Weighted average cost of capital

This is the calculation which is done to determine the cost of capital for a firm , each category of capital for the company whether equity or debt is weighted proportionately and then determines cost of capital used . Various capital sources such as the stock , common stock bonds and all other long term debts and they are included in the calculation of weighted average cost of capital (WACC ) which

is calculated by multiplication of cost of each component of capital by its proportional weight and then summing them to come up with the cost of capital

WACC E Re D Rd (1-Tc

V V

Where

Re cost of company equity

Rd cost of company debt

E Market value of the firm 's equity

D Market value of the firm 's debt

V E D

E /V Percentage of financial represented by equity

D /V Percentage of financing represented by debt

Tc Corporate tax rate

Cost of equity dividend per share /current value of stock growth rate of dividends

growth rate of dividends 2 .8 100 8 .7

3

Cost of equity 3 /25 8 .7 10 .44

Cost of debt

The before tax debt Kd INT (M-Vb )n (M Vb /2

Vb present value of bonds

Kc Fixed interest rate of bonds

n number of period till maturity

M face value of bonds

INT period dollar coupon payment (Kc M

Kd discount rate on bonds (8 .3 1000 (1000-890 /20 1 .6

1000 890 /2

Cost of debt after tax Kd (1-T , T is marginal tax rate

1 .6 (1-35 1 .04

Market value of equity common stock outstanding price per share

6 ,300 ,000 25 157 ,500 ,000

Market value of debt current amount of bonds current selling price

890 2 ,000 ,000 1 ,780 ,000 ,000

Cost of stock Kp Dp /Pp

Dp expected dividend per year

Pp market price per share of stock

stock was issued at 60 per share and stock annual dividend was 4 .8 . Therefore

Cost of stock 4 .8 /60 0 .08 or 8

Using retained earning : WACC 4 ,500 ,000 10 .44 13 ,500 ,000 1 .04 (1- .35 3 .117

18 ,000 ,000 18 ,000 ,000

Percentage of financial represented by equity 60 of financing (18 ,000 ,000 60 18 ,000 ,000 10 ,800 ,000

Percentage of financing represented by debt 18 ,000 ,000-10 ,800 ,000 7 ,200 ,000

2

Therefore WACC 10 ,800 ,000 10 .44 7 ,200 ,000 1 .04 (1- .35 6 .53

18 ,000 ,000 18 ,000 ,000

After how much financing will the increase take place Retained earnings common equity

4 ,500 ,000 2 ,700 ,000

60

3 . Required return on common stock , Kj Rf B (Km -Rf

Where

Kj Required return on common stock

Rf Risk free rate of return which is usually the current rate on Treasury bill securities in...