Question
Your companys balance sheet currently shows the following: Debt $750 million Equity $1250 million Total Assets $2,000 million Bonds have a par value of $1000,
Your companys balance sheet currently shows the following:
Debt $750 million
Equity $1250 million
Total Assets $2,000 million
Bonds have a par value of $1000, 9 years to maturity and have a coupon rate of 5.9% paid semiannually. Other bonds with similar characteristics and risk currently have a yield to maturity of 6.58%. Price of a bond is $954.36. The book value of common stock price is $50 per share. The current stock price is $22 per share in the market. Beta for your stock is 1.19 and the current risk-free return and market return are 3% and 10%, respectively. The tax rate is 35%.
- Find the market value and cost of debt.
- Find the market value and cost of equity.
- Calculate the weighted average cost of capital using market values.
- Calculate the weighted average cost of capital using book values.
- Explain the advantages and disadvantages of each weighting method.
- Calculate the cost of equity if your book value capital structure changes to 60% debt and 40% equity. Explain in detail why the cost of equity changed the way it did.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started