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Harriston Electronics builds circuit boards for...

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Harriston Electronics builds circuit boards for a variety of applications in industrial equipment. The firm was founded in 1983 by two electrical engineers who left their jobs with the General Electric (GE) Corporation. Its balance sheet for year-end 2006 describes a firm with $1,184,841.00 in assets (book values) and invested capital of approximately $2.2 billion (based on market values). December 31, 2006 Balance Sheet (Book Vlaues) Invested Capital (Market Values) Liabilities and Owner?s capital Current Liabilities Account payable 17,550,000 Notes payable 20,000,000 20,000,000 Other current liabilities 22,266,000 Total current liabilities 59,816,000 20,000,000 Long term debt (7.5% interest paid semiannually due in 2012)650,000,000 624,385,826 Total liabilities 709,816,000 644,385,826 Owner?s capital Common stock ($1 par value per share)20,000,000 Paid in capital 200,025,000 Accumulated earnings 255,000,000 Total owner?s capital 475,025,000 1,560,000,000 Total liabilities and owner?s capital 1,184,841,000 2,204,385,826 Harriston?s CFO, Margaret L. Hones is concerned that its new investments e required to meet an appropriate cost of capital hurdle before capital is committed. Consequently, she initiated a cost of capital study by one of her senior financial analysts, Jack Frist. Shortly after receiving the assignment, Jack called the firm?s investment banker to get input on current capital costs. Jack learned that although the firm?s current debt capital required a 7.5% coupon rate of interest (with annual interest payments and no principal repayments until 2012), the current yield to maturity on similar debt has risen to 8.5%, such that the current market value of the firm?s outstanding bonds had fallen to $624,385,826. Moreover, since the firm?s short term notes were issued within the last 30 days, the 9% contract rate on the notes was the same as the current cost of credit for such notes. a. What are Harriston?s total invested capital and capital structure weights for debt and equity? (Hint: The firm has some short term debt (note payable) that is also interest bearing). b. Assuming a long term U.S. Treasury bond yield of 5.42% and an estimated market risk premium of 5%, what is Harriston?s cost of equity based on the CAPM if the firm?s leveraged equity beta is 1.2? c. What is your estimate of Harriston?s WACC? The firm?s tax rate is 35%,I've attched the template problem-3

 

Paper#4266 | Written in 18-Jul-2015

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