post university fin 201 unit 5 case problem 5
Question # 00004350
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Updated on: 12/02/2013 01:03 AM Due on: 12/28/2013
Case Problem 5
Touring Enterprises, Inc., has a capital structure consisting of $18 million in longterm debt and $7 million in common equity. There is no preferred stock outstanding.
The interest rate paid on the longterm debt is 10%. The firm is in the 35% tax bracket.
On the common equity (stock), the Company pays an annual dividend of $1.20 and expects to increase the dividend by 5% per year. The market price of the stock is $50.
Based on this information, answer the following questions:
 Calculate Touring Enterprises' weighted average cost of capital (WACC).
 Work as follows: first, compute the aftertax cost of debt, then compute the cost of equity. Cite both formulas, and show all your work.
 Determine the weightings of debt and equity in the capital structure.
 Using your answers to the above questions, calculate the WACC.
 2. If Touring Enterprises were to increase the percentage of debt in its capital structure, what would happen to the WACC ? No calculation is necessary simply provide a short, nonnumeric response.
 3. Identify and explain the benefits and risks of debt financing. A twoparagraph answer will suffice.
Hints
 Think of the WACC as follows: (weighting of debt * aftertax cost of debt) + (weighting of equity * cost of equity).
 Also, compute the costs of debt and equity in percentage terms from the very beginning. If you use decimals, you will have to deal with multiplying many decimals which can lead to confusion.

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Solution: post university fin 201 unit 5 case problem 5