Question
Company A has a 10y bond outstanding which pays a coupon of 4.50% and is trading at 103.45 which corresponds to a yield of 4.08%.
Company A has a 10y bond outstanding which pays a coupon of 4.50% and is trading at 103.45 which corresponds to a yield of 4.08%. The book value of this bond is 200 million and this is its only source of debt. It also has 10 million shares in issue. The companys share price is 66. Its last dividend payment was 4. Its beta is estimated to be 1.15. The risk free rate is 2% and the market return is 12%. If the growth rate of the company is estimated to be 6% per annum, and the corporate tax rate is 30%, what is the cost of debt, cost of equity and the weighted average cost of capital (WACC) for this firm?
b] If the leverage of the firm increases how would you expect this to affect the firms WACC?
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