Question
Terck, a leading pharmaceutical company, currently has a balance sheet that is as follows: Liabilities Assets Long-term Liab $ 1,000 Fixed Assets $ 1,700 Equity
Terck, a leading pharmaceutical company, currently has a balance sheet that is as follows:
Liabilities | Assets | |||
Long-term Liab | $ 1,000 | Fixed Assets | $ 1,700 | |
Equity | $ 1,000 | Currents Assets | $ 300 | |
Total | $ 1,000 | Total | $ 1,000 |
The firm's income statement looks as follows:
Income Statement | |
Revenues | $ 1,000 |
COGS | $ 400 |
Depreciation | $ 100 |
EBIT | $ 500 |
Long-term Int. Exp | $ 100 |
EBT | $ 400 |
Taxes | $ 200 |
Net Income | $ 200 |
The firm's bonds are all 20-year bonds with a coupon rate of 10%that are selling at 90% of face value (the yield to maturity on these bonds is 11%). The stocks are selling at a P/E ratio of 9 and have a beta of 1.25. The risk free rate is 6%.
a. What is the firm's current cost of equity?
b. What is the firm's current after-tax cost of debt?
c. What is the firm's current weighted average cost of capital?
Market rate of return was not given. Assume 5.5%
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