just #16

15) Lam Research Corporation has 5 bonds outstanding rated AAA. Each bond has a face value of $1,000, pays an annual coupon payment of $45, matures in 6 years, and trades at a price of $1,026. Lam has no preferred stock outstanding but does have 2,000 shares of stock outstanding. The stock trades at a price of $7 per share. Lam's beta is 1.19. The risk-free rate is 1.9% and the expected return on the market is 10.25%. The corporate tax rate is 21%. Given this information, what is Lam's weighted average cost of capital? 10 points Debt Equity : 1.941.9610.15-1,5) = 11.94% 1 2000x7 - / 8.66% t 85% Cost = 3.16% mu su 1026 = 5130 : 2 6.82% WACC = 9.510% weight 73.18% Werght 16) Lam Research Corporation has just announced that their debt has been downgraded and is now rated CCC. This news has made the price of Lam's bonds drop to $500 Historically, CCC rated debt defaults 12.2% of the time. If Lam defaults on their debt, bond holders can expect to lose $0.50 for each dollar invested. Given no other changes regarding Lam's debt from the previous question, what is the cost of Lam's debt now? 10 points