Peter Audio Shop has 200,000 shares of common stock outstanding at a market price of $80 a

Question:

Peter Audio Shop has 200,000 shares of common stock outstanding at a market price of $80 a share. The common stock has a beta of 3.5. The market risk premium is 6% and the risk-free rate is 2%. It is expected that the company will pay a $14.4 dividend on this stock for next year, after that dividends will grow at a constant 5% rate. b. In addition, the company has 1000, 6% semiannual bonds that sell at 105% of face value and mature in 5 years (assume face value = $1000). They have no other interest-bearing debt. The tax rate is 40%. i. Estimate the company’s cost of debt. Estimate the company’s cost of common stock using CAPM and using dividend growth model, do both models give the same result? Estimate the WACC. Use the market value balance sheet to estimate the company’s weighted average cost of capital. d. Now, suppose the company changed its capital structure by issuing $2,000,000 in debt and buying back $2,000,000 in stock. Use Hamada’s equation to calculate the company’s unlevered beta (using the old D/E ratio). Re-lever the beta to calculate the new beta with the new D/E ratio. Re-calculate the company’s cost of common equity and WACC with the new level of debt (assuming the company’s cost of debt doesn’t change despite its new leverage). For the company’s cost of common equity, just use the CAPM estimate and ignore the DDM estimate.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...