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 the data for the Anson Jackson Court Company (AJC). What is AJC's current total market value and weighted average cost of capital?

Question

Quizplus · Accepted Answer

$\begin{aligned}
V &=\text { Debt }+\text { Equity }=\$ 200,000+\$ 60(10,000)=\$ 200,000+\$ 600,000 \
&=\$ 800,000
\end{aligned}$ 
 $\begin{aligned}
W A C C &=w_{c} r_{\mathrm{s}}+w_{\mathrm{d}}(1-T) r_{d} \
&=((\$ 600,000 / \$ 800,000)(0.088))+(\$ 200,000 / \$ 800,000)(1-0.4)(0.06) \
&=(0.75)(0.088)+(0.25)(0.036)=0.075=7.5 \%
\end{aligned}$ 
As a check, V = FCF/WACC. Since g = 0, FCF = NOPAT = EBIT(1 σ T).
 $V = \$ 100,000 ( 1 - 0.4 ) / 0.075 = \text { \$ 800,000}$

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