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9 pts XYZ Inc. produces photographic equipment. Based on its balance sheet, it has 100,000 bonds with $100 par. Its bonds pay a semi- annual
9 pts XYZ Inc. produces photographic equipment. Based on its balance sheet, it has 100,000 bonds with $100 par. Its bonds pay a semi- annual coupon of 8% per year and have 6 years to maturity. The next coupon date is in 6 months. XYZ's current bond yield is 10% per year with semi-annual compounding. The unlevered beta of its common stock is 1.30 and the total market capitalisation of these stocks is $22 million. XYZ's also has retained earnings of $20 million in its balance sheet. XYZ's management considers building a new plant. Management assumes that the beta of this project is equal to the company beta. The risk-free rate is 3% per year annually compounded and the market risk premium is 6% per year annually compounded. The corporation tax rate is 30%. a) Determine XYZ Inc's market value of bonds rounded to the nearest dollar (2 marks). b) Determine XYZ Inc's cost of equity (4 marks). Hint: Levered beta-Unlevered beta [1+(1-Tc)*D/E]. c) Determine the after-tax annual discount rate for the plant
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