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what equity amount we use to calculate WACCÂ Â
Question
Acme, Inc.
Balance Sheets as of 12/31/09 and 12/31/10
($ in thousands)
2007 2008 2007 2008
Cash $ 2650 2810 accounts payable $ 1350 $ 1000
Accounts rec. 980 840 long-term debt 3300 3300
Inventory 1560 1990 common stock 3200 3500
Total $ 5190 5640 retained earnings 940 1200
Net fixed assets 3600 3360
Total asset $ 8790 $ 9000 total liabilities & equity $ 8790 $ 9000
Notes to Financial Statements: The rate and amount of the Company’s total long-term, fixed rate debt outstanding for the Company in 2009 and 2010 remained unchanged. The 12/31/10 market rate on debt for companies with a similar risk profile and maturity as Acme’s was 12%. The market value of Acme’s long-term debt on 12/31/10 was $3 million. Acme’s market capitalization on 12/31/10 was $6 million. As of 12/31/10, the risk free rate was 3%, the expected market rate of return was 11%, and Acme’s beta was 1.50. Due to a large net-operating-loss-cany-forward and substantial tax credits, Acme paid no taxes in 2009 and 2010, and it is NOT expected that the Company will be paying any taxes in the next 5 years.
To calculate the Weighted Average Cost of Capital (WACC) for Acme as of 12/31/10, what amount should we use for equity?
a. $4,140 million
b. $4,420 million
c. $4,700 million
d. $5,350 million
e. $6,000 million
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