Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

A company has 2 million shares of common stock outstanding and 2 5 , 0 0 0 semiannual bonds outstanding, each with an annual coupon

A company has 2 million shares of common stock outstanding and 25,000 semiannual bonds outstanding, each with an annual coupon rate of 10% and a par value $1,000. The common stock currently sells for $37.75 per share and has a beta of 1.3. The bonds have exactly 10 years to maturity and the current annual yield to maturity (YTM) is 11%. The market risk premium for stocks is 7.6%, risk-free Treasury Bills are yielding 5.2%, and company's tax rate is 35%. Assume that CAPM holds, but IGNORE the impact of leverage on cost of equity capital (ie. this question is from Chapter 14, not 16!). Calculate the following:
Market Value of debt = $ Blank 1. Fill in the blank, read surrounding text.
(When calculating your bond price, keep as many decimals as possible in your intermediate steps. Round your final bond price to 2 decimal places (closest penny), so that final answer is automatically rounded to closest dollar- DO NOT use commas!)
Market Value Debt/Equity Ratio = Blank 2. Fill in the blank, read surrounding text.
(Express answer as a decimal, rounded to 2 decimal places- ie 0.75)
After tax Cost of Debt = Blank 3. Fill in the blank, read surrounding text.
%(Express your answer in percentage terms, rounded to 2 decimal places- ie 19.65)
Cost of equity= Blank 4. Fill in the blank, read surrounding text.
%(Express your answer in percentage terms, rounded to 2 decimal places- ie 24.00)
WACC = Blank 5. Fill in the blank, read surrounding text.
%(Don't round intermediate steps. Express your answer in percentage terms, rounded to 2 decimal places- ie 14.51)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions