Question
A corporation has the following numbers on its audited balance sheet: Outstanding debt of $450,000 and common equity of $900,000. The debt has a current
A corporation has the following numbers on its audited balance sheet: Outstanding debt of $450,000 and common equity of $900,000. The debt has a current market value of $400,000. The company's equity has a market value of $1,050,000. Assume that the cost of equity is 9.0% and the yield to maturity on the debt is 7.0%. The relevant tax rate is 21%. Questions: a. Calculate the Weighted Average Cost of Capital. b. Indicate which bond and equity number you used in these calculations and the rationale that supports your selection. c. Explain what factors might have caused the market value of debt to change and the market value of equity to change from this accounting balance sheet numbers.
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