Question
A company has two bonds outstanding, both with semiannual coupons. The first one has a coupon rate of 3%, a maturity of 15 years and
A company has two bonds outstanding, both with semiannual coupons. The first one has a coupon rate of 3%, a maturity of 15 years and a YTM of 8%. 42,000 of these bonds are outstanding. The second bond has a coupon rate of 9%, a maturity of 20 years and a price of $2,149. The book value of this issue is $18 million.
The company has no preferred stock, but 3 million shares of common stock outstanding, trading at $68.3, and its equity beta is 1.2. The yield on treasuries is 6% and the expected market risk premium is 6%. The marginal tax rate is 34%. The target capital structure weight for equity is 1 percentage points larger than the actual one. cost of equity = 0.132
before-tax cost of debt for bond 1 = 0.08
before-tax cost of debt for bond 2 = 0.02
market value of bond issue 1 = 23843365
market value of bond issue 2 = 38685780
before-tax cost of debt overall = 0.04288
target capital structure weight for equity = 0.776
What is the weighted average cost of capital? (answer is not 0.1138)
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