Question
Consider the following capital structure for AAA Corporation. The company has one debt issue, preferred stock and common stock in its capital structure. The firms
Consider the following capital structure for AAA Corporation. The company has one debt issue, preferred stock and common stock in its capital structure. The firms tax rate is 40%; the risk-free rate is 3%. Details on the components of the capital structure are listed below. Bond issue: Coupon-paying issue $100 million par 10% semiannual coupon Remaining maturity of 15 years Currently priced in market at 90% of par value Preferred equity: Coupon-paying issue $50 million par 6% annual coupon Currently priced to yield 12% Common equity: 2 million shares outstanding Current share price: $50 Stocks beta: 1.5 Market risk premium = 7.5% 8.) What is AAAs cost of debt? 9.) What is the total market value of AAAs preferred stock? 10.) What is AAAs weighted average cost of capital?
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