Question
Holiday Inn Resorts Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has $
Holiday Inn Resorts Company currently has 1.2 million common shares of stock
outstanding and the stock has a beta of 2.2. It also has $ 10 million face value of bonds
that have five years remaining to maturity and 8% coupon with semi-annual payments and are priced to yield 13.65%. If the company issues up to $ 2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65%; if it issues bonds beyond $2.5 million, the expected yield on the entire issue will be 16%. The company management has learnt that it can issue new common stock at $ 10 a share. The current risk-free rate of interest is 3% and the expected market return is 10%. The companys marginal tax rate is 30%. If the company raises $ 7.5 million of new capital while maintaining the same debt-to-equity ratio, what would be its weighted average cost of capital?
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