Question
Consider the following capital structure for Sea Shore Corporation. The company has a publicly-traded bond issue, preferred shares, and common equity in its capital structure.
Consider the following capital structure for Sea Shore Corporation. The company has a publicly-traded bond issue, preferred shares, and common equity in its capital structure. The firms tax rate is 35%. The risk-free rate is 7%.
Details on the components of the capital structure are listed below.
Debt: | Fixed coupon-paying bond issue |
$80 million par | |
6% semiannual coupon | |
Remaining maturity of 10 years | |
Currently priced in market at 105% of par value | |
Preferred equity: | $100 million par |
6% annual coupon | |
Each $1,000 par issue is currently priced at $925. | |
Common equity: | 10 million shares outstanding |
Current share price: $40 | |
Stock beta: 0.5 | |
Market risk premium = 10% |
Sea Shores pre-tax cost of debt is closest to:
A) 2.67%
B) 3.00%
C) 5.35%
D) 6.00%
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