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The CEO of FUN Corp. believes the cost of capital used in the previous question is inaccurate. You have been assigned to estimate cost of
The CEO of FUN Corp. believes the cost of capital used in the previous question is inaccurate. You have been assigned to estimate cost of capital for FUN Corp.
- The company has a capital structure which consists of 80% long-term debt and 20% common stock.
- The companys credit rating is Ba1/BB+ (equivalent to spread of 2%). Beta of debt is 0.
- The companys common stock currently sells for $35 per share with 2.5 million shares outstanding.
- The companys marginal tax rate is 30%. Market risk premium is 5%. Risk-free rate is 5%.
- FUN Corp.s most comparable competitor is Toy Inc. who has no debt. Toy Incs equity beta is 1.4.
Answer the following questions (please show reasonings or calculations):
- What is Toy Incs cost of capital?
- What is FUN Corps cost of capital?
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