Find the cost of debt and cost of equity

Assignment Help Financial Management

Reference no: EM131063639

A company is firm financed with common stock (equity) and bonds (debt). It has bonds outstanding with a price of $980 (par value of $1000). The bonds mature in 10 years, have a coupon rate of 6% and pay coupons semi-annually. The firm’s beta is 1.4, the risk free rate is 5%, and the market return is 10%. The tax rate is 40%. The market value of debt is $400 million (wd = 40%) and the market value of equity is $600 million (wc = 60%). Compute the WACC. Use the CAPM model to find the cost of equity.

a. Find the cost of debt (Yield to Maturity).

b. Find the cost of equity using CAPM.

c. Find the WACC.

Reference no: EM131063639

Questions Cloud

Does this situation correspond to short-run equilibrium : a) Does this situation correspond to short-run equilibrium? Why or why not? b) Does this situation correspond to long-run equilibrium? Why or why not? Draw a graph to support your answer.

Discuss difference between comparative and ratio analysis : Write a paper of no more than 750 words in which you discuss the difference between comparative and ratio analysis. Differentiate and share the purpose and importance of each.

What is the company debt-equity ratio : Fama’s Llamas has a weighted average cost of capital of 9.5 percent. The company’s cost of equity is 11 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 40 percent. What is the company's debt-equity ratio?

Journal form without explanation for the issuance : a. on July 1, 2013, Gallation Corporation issued bonds with a face value of $1,000,000. The bonds carry a face interest rate of 10 percent that is payable each July 1 and January 1.

Find the cost of debt and cost of equity : A company is firm financed with common stock (equity) and bonds (debt). It has bonds outstanding with a price of $980 (par value of $1000). The bonds mature in 10 years, have a coupon rate of 6% and pay coupons semi-annually. The firm’s beta is 1.4, ..

Standard deviation for the minimum-variance portfolio : A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.9%. What is the expected retur..

What must be the coupon rate on bonds : Merton Enterprises has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,086. At this price, the bonds yield to maturity is 6.8 percent. What must be the coupon rate on Merton’s bonds? (Face Value =$1000)

Net present value and internal rate of return : Comparing competing projects' net present value and internal rate of return ________. A. always results in the same ranking of projects B. always results in the same accept-reject decision C. may give different accept-reject decisions D. is only nece..

What is your best estimate of the aftertax cost of debt : Shanken Corp. issued a bond with a maturity of 10 years and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 96 percent of its face value. The book value of the debt issue is $50 million. What is your best estimate of t..

User Account

All Pages