Question
AM Gen Corp. has $250 million of bonds at par value outstanding that were recently issued. The bonds have a stated rate of 6.5% and
AM Gen Corp. has $250 million of bonds at par value outstanding that were recently issued. The bonds have a stated rate of 6.5% and a yield to maturity of 7.97%. They currently trade in the market at 90% of par value. The company is publicly traded and has 20 million shares outstanding that sell for $25.00 per share. The stock's beta is 1.35, and currently the one year and 20 year treasuries yield .5% and 2.0%, respectively. The expected return on the stock market is 8.5% and AM Gen's tax rate is 25%.
1) What is the cost of debt that should be used in the calculation of the weighted cost of capital?
2) What is the cost of equity?
3) What are the weightings to be used in the calculation of the weighted cost of capital?
4) What is the weighted cost of capital?
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