Estimate the cost of capital for the cat corporation

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Reference no: EM132061159

You have been asked to estimate the cost of capital for the CAT corporation. The company has 4 million shares and 130,000 bonds of par value $1,000 outstanding. In addition, it has $30 million in short-term debt from its bank. The target capital structure ratio is 65 percent equity, 30 percent longterm debt, and 5 percent short-term debt. The current capital structure has temporarily moved slightly away from the target ratio. The company’s shares currently trade at $50 with a beta of 1.35. The book value of the shares is $22. The annual coupon rate of the bonds is 9 percent, they trade at 105 percent of par, and they will mature in ten years. Interest on the short-term debt is 3.5 percent. The current yield on ten-year government bonds is 4.2 percent. The market risk premium is 5.5 percent. The corporate tax rate applicable is expected to be 21 percent. Based on these data, calculate the cost of capital for the CAT corporation.

Reference no: EM132061159

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