question 1

Zip Ltd. has an outstanding loan of $50 million with a bank, and the interest rate on the loan is 3%. Zip Ltd. has a second type of debt which is a bond issue that the company sold 2 years ago for $38 million. The market value of these bonds today is $30 million. The effective annual yield on these bonds is 5%. The company has also 10 million ordinary shares outstanding with a current price of $12 per share. The Beta of the ordinary share is 1.2, the market risk premium is 6% and the risk free rate is 2.5%. Zip Ltd. has a 30% corporate tax rate.

Compute Zip Ltd's weighted average cost of capital (WACC).

question 2

Consider a 20-year $1000 bond that was issued 5-years ago. If the bond has an annual coupon rate of 7%, pays coupon semi-annually, and is currently selling for $900. Estimate if the yield to maturity is more likely to be 8.16%, 6.16% or 5.15%. Explain why