Tax rate 30% Riskfree rate 1.6% Market rate 7.8%

Use the chart below and the yields to maturity chart in the slides to answer Questions 1 to 7.

Loan		Common stock
Amount	$10,000,000	Beta	1.10
Interest rate	0.045	Shares outstanding	10,000,000
Bond issue		Price per share	$5.00
30 yr. AAA rated
Number issued	21,000
Price per bond	$1,100

1. What is the yield to maturity on the bond issue?

2. What percentages do the loan and bond issue contribute to the firms total debt?

3. Find the after-tax weighted average cost of debt.

4. What is cost of common stock?

5. What is the market value of the common stock?

6. What are the percentages of debt and equity in the firms capital structure?

7. What is the firms weighted average cost of capital?

Credit Ratings and yields:

Moody's	S&P	Fitch		7 yr	10 yr	30 yr
Aaa	AAA	AAA	Firm can service debt no matter what.	0.022	0.023	0.042
Aa	AA	AA	Very high quality by all standards.	0.023	0.024	0.044
A	A	A	Investment grade; good quality.	0.024	0.025	0.046
Baa	BBB	BBB	OK, but needs to be monitored.	0.029	0.031	0.053
Ba	BB	BB	Somewhat speculative.	0.049	0.050	0.072
B	B	B	Very speculative.	0.073	0.075	0.097
Caa	CCC	CCC	Substantial risk.	0.089	0.092	0.113