The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market (i. e., Rm)is 11.50%. The firm's tax rate is 40%.
1) What is the best estimate of the after-tax cost of debt (%)? i. e, (1-t)*kd?
2) Based on the CAPM, what is the firm's cost of equity (%) ? i. e., ke?
3) Calculate the weights of market value of debt and market value of equity for use in calculating the WACC based in market values? i. e., Wd (%) and We (%)
4) Calculate ABC's WACC (%) based on your answers to 1), 2), and 3)
Show all of your calculations with appropriate explanation. You won't earn any point without showing allof your calculation work.
Assets
Current assets38,000,000
Net plant, property, and equipment101,000,000
Total assets139,000,000
Liabilities and Equity
Accounts payable10,000,000
Accruals9,000,000
Current liabilities19,000,000
Long-term debt (40,000 bonds, $1,000 par value)40,000,000
Total liabilities59,000,000
Common stock (10,000,000 shares)30,000,000
Retained earnings50,000,000
Total shareholders' equity80,000,000
Total liabilities and shareholders' equity139,000,000
Answers: 3
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The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year,...
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