Question

Turbine Technologies Ltd. Balance Sheet as at December 31, 2018 (in thousands) Cash $310 Accounts payable $1,500 Accounts receivables $2,990 Other short-term liabilities $250 Inventory $3,400 Total current liabilities $1,750 Total current assets $6,600 Long-term bonds $6,200 Net fixed assets $19,750 Total liabilities $7,950 Preferred stock $3,000 Common stock $4,000 Retained earnings $11,500 Total common equity $18,500 Total assets $26,450 Total liabilities and equity $26,450 Turbine Technologies Ltd. (TTL) currently has bonds outstanding which trade at 104, have a coupon rate of 6% paid semi-annually, and mature in 10 years. Any new bonds issued would be (at the request of a large institutional investor) sold initially at 98, which is a small discount to their par value. Assume issuance costs are negligible. The preferred stock has a fixed dividend rate of 6.25% and a par value of $25 per share. Their current market value is $26 per share. New preferred stock would be issued at their par value. Flotation costs are estimated at 3%. TTL has 600,000 common shares outstanding with a market value of $26 per share. The upcoming dividend is expected to be $1.36, and the dividend growth rate is expected to be 3%. The firm has a beta of 0.90, and the current yield on long-term government bonds is 4.3%. The yield on the market portfolio is expected to be 10%. Determine the cost of common equity using the simple average of the dividend valuation and capital asset pricing model approaches. Assume that Turbine Technologies Ltd.'s common equity is from internal sources. Turbine Technologies Ltd.'s tax rate is 30%. Required: Compute TTL's weighted average cost of capital.

Turbine Technologies Ltd.
Balance Sheet as at December 31, 2018 (in thousands)
Cash
$310
Accounts payable
$1,500
Accounts receivables
$2,990
Other short-term liabilities
$250
Inventory
$3,400
Total current liabilities
$1,750
Total current assets
$6,600
Long-term bonds
$6,200
Net fixed assets
$19,750
Total liabilities
$7,950
Preferred stock
$3,000
Common stock
$4,000
Retained earnings
$11,500
Total common equity
$18,500
Total assets
$26,450
Total liabilities and equity
$26,450
Turbine Technologies Ltd. (TTL) currently has bonds outstanding which trade at 104, have a coupon rate of 6% paid semi-annually, and mature in 10 years. Any new bonds issued would be (at the request of a large institutional investor) sold initially at 98, which is a small discount to their par value. Assume issuance costs are negligible.
The preferred stock has a fixed dividend rate of 6.25% and a par value of $25 per share. Their current market value is $26 per share. New preferred stock would be issued at their par value. Flotation costs are estimated at 3%.
TTL has 600,000 common shares outstanding with a market value of $26 per share. The upcoming dividend is expected to be $1.36, and the dividend growth rate is expected to be 3%. The firm has a beta of 0.90, and the current yield on long-term government bonds is 4.3%. The yield on the market portfolio is expected to be 10%. Determine the cost of common equity using the simple average of the dividend valuation and capital asset pricing model approaches. Assume that Turbine Technologies Ltd.'s common equity is from internal sources. Turbine Technologies Ltd.'s tax rate is 30%.
Required:
Compute TTL's weighted average cost of capital.

Added by Karen S.

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