You and your friend have opened a security valuation business. You need to determine the weighted average cost of capital and the value of a client companys stock.

Bond Series:

40,000 bonds outstanding. Each bond matures in 15 years, with a par value of $1000, semi-annual coupons, with an annual coupon rate 12%. The current yield to maturity (YTM) on comparable bonds is 9%.

The Common Stock:

1,000,000 shares of common stock outstanding. Each share is traded at $24.61.

The expected market risk premium (Rm Rf) is 8.5% and the risk-free rate (Rf) is 5%. The companys equity beta is 1.0 (i.e., this stock has the same amount of systematic risk as the market portfolio). The companys marginal tax rate is 34%.

a) What is the market value of the companys debt liabilities? What is the market value of the companys equity?

b) What is the expected return on the companys stock?

c) What is the companys weighted cost of capital (WACC)?