Question
1. The capital structure of Honda Motors consists of common stock; preferred stock; and long term debt in the proportions of 60%; 5%; and 35%
1. The capital structure of Honda Motors consists of common stock; preferred stock; and long term debt in the proportions of 60%; 5%; and 35% respectivley. The risk premium of Honda Motor's stock vs long-term govenment bonds is 11%. The 20 year US long-term Government bond yield is 4.0%. The company's credit rating is BBB+ and the credit spread for 20-year BBB+ corporare debt is 2.5%. Honda Motor's effective tax rate is 30%. The company recently issued preferred stock with a par value = $50/share that pays 10% dividend yield. Issuance costs were 5% of par.
a) What is Honda's cost of equity?
b) What is Honda's pre-tax and after-tax cost of debt?
c) What os Honda's cost of preferred stock?
d) The company is considering expanding its operations in the US and wants to determine its all-in capital cost based on its weighted average cost of capital (WACC). Calculate the company's WACC using the above information.
e) The IRR of the expansion is 13%. If Honda Sky finances the project with retained earnings (eg. all equity), should they proceed with the project? Why or why not?
f) If Honda Motors wants to finance the project using all three sources of financing in the proportions stated above, should it proceed with the project? Why or why not?
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