Question
A. Suppose the Tysseland Company has this book value balance sheet: The current liabilities consists entirely of notes payable to the bank, and the interest
A.Suppose the Tysseland Company has this book value balance sheet:
The current liabilities consists entirely of notes payable to the bank, and the interest rate on the debt is 10 percent, the same as the rate of new bank loans.
The long-term debt consists of 30,000 bonds, each of which has a par value of $1,000, carries an annual coupon interest rate of 6 percent, and matures in 20 years. The doing interest rate on new long-term debt is 10 percent, which is also the present yeild to maturity on the bonds.
The common stock sells for $60 per share.
The firm's beta is 1.6, the risk free rate is 9 percent and the expected return on the market is 13 percent.
Required:
a)Compute the firm's market value capital structure.(5 Marks)
b)What is the firm's Weighted Average cost of Capital (WACC).(10 Marks)
c)What are the likely effects of a policy in which a company fails to adjust for differences in risk when estimating the cost of capital for their various projects?(5 Marks)
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