6. Cost of Capital

Now (use the following information) suppose that:

• The cost of debt is 3.25% (before tax),
• Flotation costs (F) = 7% of issue price,
• The debt is trading at $1,085.00,
• There are 7,456 bonds outstanding,
• The tax rate is .40,
• D0 = $3.25
• g = 3.15%
• Beta = 1.38
• rRF = 1.75%

RPm =5%,

• The firm has 200,000 shares of common stock outstanding,
• Common stock shares are trading at $57.00/share (P0).

• a. (5 points)
• Given the above information, what is the Market value of the firm's debt?

$___________________

• Given the above information, what is the Market value of the firm's equity?

$___________________

• Now calculate the weight of debt for the firm (Wd). You will use this to calculate the WACC.
• Now calculate the weight of equity for the firm (Wce). You will use this to calculate the WACC.

• b. (10 points) What is the cost of existing common equity (retained earnings)? (Briefly describe your approach/method as well as your answer)

• c. (10 points) What is the firm's WACC?
• (Briefly describe your approach/method as well as your answer)