Question
2) Acme Mining Company has 7.7 million shares of common stock outstanding. In addition, the company has 200,000 bonds outstanding. The bonds have a 6.4%
2) Acme Mining Company has 7.7 million shares of common stock outstanding. In addition, the company has 200,000 bonds outstanding. The bonds have a 6.4% coupon (paid semi-annually) and their par value is $1,000. The common stock currently sells for $35 per share and has a beta of 1.20. The bonds have 10 years until maturity, and sell for 105% of par. The market risk premium is 7%, the risk-free rate is 2%, and the companys tax rate is 40%.
If the company is evaluating a new investment project that has the same risk as the companys typical project, what rate should the firm use to discount the projects cash flows? Please show calculations by hand, not on Excel. Thank you!!!
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