Noting that both these bond issues have similar ratings, comment on the use of the yield to maturity you have just calculated as an estimate of the cost of debt financing to the two firms. 4-12 Three-Step Process for Estimating a Firm's WAGG Harriston Electronics builds circuit boards for a variety of applications in industrial equipment. The firm was founded in 1986 by two electrical engineers who left their jobs with General Electric (GE) Corporation. Hamston Electronics' balance sheet for year-end 2014 describes a firm with $1,184,841,000 in assets (book values) and invested capital of approximately $2 2 billion (based on market values) December 31, 2014 Llblikles and Owners' Capital Balance Sheet (Book Values) Invested Caphal (Market Values) Current Labirion Accounts payable $ 17 550 000 Notes payable 20.030 080 30.030.080 Other current labities 22 206,000 Totell currant Eabilities $ 59 816 080 $ 20,000,000 Long-term debt (7 5%% Interest pald semiannually. due in 2930) $ 650.003.808 4 624 365.836 Total Laborion $ 709016.808 Owners' capital Common Mock ($1 par value per share) $ 20.030 080 Pald In-capital 200 025 080 Accumulated saminga 255 090 080 Total curor' caphal $ 475.025,000 $1.560.000.000 Total lablichen and owners' capital $1.184.841,090 $2.204.305.626 Harriston's CFO. Margaret L. Hines, is concerned that it's new investments be required to meet an appropriate cost of capital hurdle before capital is committed. Consequently, she initiated a cost of capital study by one of her senior financial analysts, Jack Frist. Shortly after receiving the assignment. Frist called the firm's investment banker to get input on cument capital costs Frist learned that. although the Arm's current debt capital required a 7.5%% coupon rate of interest (with annual interest payments and no principal repayments until 2020) the current yield to maturity on similar debt had risen to 8.5% so that the current market value of the firm's outstanding bonds had fallen to $424,385,824 Because the firm's short-term notes were issued within the last thirty days. the 9%% contract rate on the notes was the same as the current cost of credit for such notes. a. What are Harriston's total invested capital and capital structure weights for debt and equity? (Mind The firm has some short-term debt [notes payable] that, like long-term debt, is also interest-bearing debt} b. Assuming a long-term US Treasury bond yield of 5 42% and an estimated market risk premium of 5%, what is Harriston's cost of equity based on CAPM if the firm's levered equity beta is 1.27 C. What is your estimate of Harriston's WACO? The firm's tax rate is 35%
