Exhibit 16.4
The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.
-Refer to Exhibit 16.4.What is AJC's current total market value and weighted average cost of capital?

Question

Quizplus · Accepted Answer

To find the current total market value of AJC, we need to calculate the total value of both the debt and the equity:

Total market value = market value of debt + market value of equity
Total market value = $200,000 + (10,000 shares * $60.00 per share)
Total market value = $200,000 + $600,000
Total market value = $800,000

To find the weighted average cost of capital (WACC), we need to calculate the cost of debt and the cost of equity:

Cost of debt = (coupon rate * market value of debt) / total market value
Cost of debt = (6% * $200,000) / $800,000
Cost of debt = 1.5%

Cost of equity = cost of equity = current cost of equity
Cost of equity = 8.8%

WACC = (weight of debt * cost of debt) + (weight of equity * cost of equity)
WACC = (0.25 * 1.5%) + (0.75 * 8.8%)
WACC = 2.2% + 6.6%
WACC = 8.8%

Therefore, AJC's current total market value is $800,000 and its weighted average cost of capital is 7.5%. The correct answer is D.

Exhibit 16.4 The Anson Jackson Court Company (AJC) Currently Has $200,000 Market