Question 2

Cross-Ocean Boats Ltd. is in the 30% tax bracket. It is interested in determining the minimum return that its stakeholders (investors) will accept. Since you have applied for an internship with them, they have assigned this task to you. To get started with your work, you compile some information as follows:

- Cross-Oceans has 3000, 6% semi-annual coupon bonds outstanding. These bonds will mature in 12 years and they sell for 80% of their par value as of now.

- The firm is also partly equity financed. It has 100,000 outstanding common shares and 19,000 shares of preferred stock. The common shares command a market price of $55 per share and the beta of Cross-Ocean stock is 1.20. Preference shares offer a 6% fixed dividend and sell for $110 per share.

- The risk-free rate is 4% and the market risk premium is 6%

Armed with this information, compute:

1. The minimum required return by Cross-Oceans debtholders

2. The minimum required return by Cross-Oceans common shareholders

3. The minimum required return by Cross-Oceans preferred shareholders

4. The overall minimum required return for Cross-Oceans stakeholders.