Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Beltrail way INC. has capital that consists of 45% debt and 55% common equity. The company's equity financing will come from retain earnings. The company's

Beltrail way INC. has capital that consists of 45% debt and 55% common equity. The company's equity financing will come from retain earnings. The company's long-term bonds trade at $990 with a 6% coupon rate with semi annual coupon payments and 15 years to maturity. The company's common stock is currently trading at $40 per share and expects a dividend of $1 per share (D1) over the next year. Earnings and dividends are expected to grow at 5% annually. The risk free rate is 4%, the market return is 8% and the company's beta is 1.1. The yield om the corporate A bond is 5% and the company's tax rate is 25% (using the cost of the retained and assuming no preferred stock.

A. What is the cost of debt?

B. Can you use the CAPM model to show retained earnings? The DCF model? The bond yield plus risk premium? What's the average cost of retained earnings if so?

C. What's the weighted average cost of capital?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Stocks Bonds And The Investment Horizon

Authors: Haim Levy

1st Edition

9811250146, 978-9811250149

More Books

Students also viewed these Finance questions