The A. J. Croft 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.
-What is AJC's current total market value and weighted average cost of capital?
A) $600,000; 7.5%
B) $600,000; 8.0%
C) $800,000; 7.0%
D) $800,000; 7.5%
E) $800,000; 8.0%

Question

Quizplus · Accepted Answer

The total market value is the sum of the market value of equity ($600,000) and the market value of debt ($200,000), totaling $800,000. The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc), where E is equity, V is total value, Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Plugging in the values gives a WACC of 7.5%.

The A J Croft Company (AJC) Currently Has $200,000 Market Value (And