Question
As of 2020, long-term US Treasury notes yield 1.0%, a major food firms beta is 0.60 based on the average of various financial sites and
As of 2020, long-term US Treasury notes yield 1.0%, a major food firms beta is 0.60 based on the average of various financial sites and the median market risk premium (Rm Rf) for the CAPM is 5.4%. The companys debt is rated A1 by Moodys. The company issued a bond in an earlier period that matures in five-years with a 3.60% coupon (paid semi-annual) priced @ 107.5 (100 par) in the secondary market. The firm is taxed @ 20.00% and relies on long-term debt @ $38 billion and equity @ $14 billion for capital. Management project the firms net income will equal $7 billion this year, no longer repurchase stock and will pay dividends equal to $5 billion First, estimate the weighted, average, after-tax cost of capital for the firm when relying on retained earnings for equity. Estimate the cost of equity by the CAPM and the cost of debt from the indicated pricing and yield-to-maturity of their debt trading in the secondary market. Second, identify the dollar breakpoint for the firms cost of capital when the company would no longer rely on retained earnings for the pro-rata share of capital but must issue common stock given projections of net income and dividends. Third, how and why should the cost of capital change when the company must rely on new issues of common stock v retained earnings when obtaining capital from equity?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started