2) Weed Out, Inc., a weed trimmer manufacturer, has decided to become a player in the bicycle/skateboard industry. Weed Out has identified a pure-play company, Weenie Wimp Wheels, with the following characteristics: BE= = 1.1 Debt: $50 million of $1,000 bonds maturing in 2 years with 8.5% coupon rate (interest paid semiannually) and YTM on similar bonds in the market is 10%. 3 million common shares outstanding; yesterday's close price was $33 per share. 34% Equity: Tax rate: (a) If the risk free rate is 9% and the required rate of return on the market portfolio is 17%, what discount rate should Weed Out use to analyze its investment in the bicycle/skateboard industry? (Assume that it is an all equity firm) Recalculate the discount rate assuming that Weed Out is a livered firm with the following characteristics: (assume that the new project's capital structure is expected to be the same as the firm's existing capital structure) (b) i) ii) $20 million of $1,000 bonds maturing in 5 years with 10% coupon rate (interest paid semiannually) and a market value of $900 per bond. 2 million outstanding shares. Reported earnings for the current year are $6 million. The firm is passing through a constant growth stage with payout ratio of 60% and 25% expected return on equity. Current stock beta (i.e., before taking the new project is 1.5). Tax rate = 40%. iii) 2) Weed Out, Inc., a weed trimmer manufacturer, has decided to become a player in the bicycle/skateboard industry. Weed Out has identified a pure-play company, Weenie Wimp Wheels, with the following characteristics: BE= = 1.1 Debt: $50 million of $1,000 bonds maturing in 2 years with 8.5% coupon rate (interest paid semiannually) and YTM on similar bonds in the market is 10%. 3 million common shares outstanding; yesterday's close price was $33 per share. 34% Equity: Tax rate: (a) If the risk free rate is 9% and the required rate of return on the market portfolio is 17%, what discount rate should Weed Out use to analyze its investment in the bicycle/skateboard industry? (Assume that it is an all equity firm) Recalculate the discount rate assuming that Weed Out is a livered firm with the following characteristics: (assume that the new project's capital structure is expected to be the same as the firm's existing capital structure) (b) i) ii) $20 million of $1,000 bonds maturing in 5 years with 10% coupon rate (interest paid semiannually) and a market value of $900 per bond. 2 million outstanding shares. Reported earnings for the current year are $6 million. The firm is passing through a constant growth stage with payout ratio of 60% and 25% expected return on equity. Current stock beta (i.e., before taking the new project is 1.5). Tax rate = 40%. iii)
