Anson Jackson Court Company (AJC)
The Anson Jackson Court (AJC) currently has $150,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%.Its earnings before interest and taxes (EBIT) are $89,000, and it is a zero growth company.AJC's current cost of equity is 10%, and its tax rate is 25%.The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.
-Refer to the data for the Anson Jackson Court Company (AJC).What is AJC's current total market value and weighted average cost of capital? Total Market Value; WACC

Question

Quizplus · Accepted Answer

First, we need to calculate the market value of equity using the current stock price and number of shares outstanding:

Market value of equity = Number of shares outstanding x Price per share
Market value of equity = 10,000 x $60.00
Market value of equity = $600,000

Next, we can calculate the market value of the firm by adding the market value of equity to the market value of debt:

Market value of the firm = Market value of equity + Market value of debt
Market value of the firm = $600,000 + $150,000
Market value of the firm = $750,000

To calculate the weighted average cost of capital (WACC), we need to determine the proportion of the firm's financing that comes from equity and debt:

Proportion of financing from equity = Market value of equity / Market value of the firm
Proportion of financing from equity = $600,000 / $750,000
Proportion of financing from equity = 0.80

Proportion of financing from debt = Market value of debt / Market value of the firm
Proportion of financing from debt = $150,000 / $750,000
Proportion of financing from debt = 0.20

Next, we can use the cost of equity, cost of debt, and the proportion of financing to calculate the WACC:

Cost of equity = 10%
Cost of debt = 6% (given in the problem)
Tax rate = 25% (given in the problem)

WACC = (Proportion of financing from equity x Cost of equity) + (Proportion of financing from debt x Cost of debt x (1 - Tax rate))
WACC = (0.80 x 10%) + (0.20 x 6% x (1 - 0.25))
WACC = 8.9%

Therefore, the correct answer is D) $750,000; 8.9%.