3. The common stock of Company has a beta of 0.9 The Treasury bil rate is 4%, an

Question

3. The common stock of Company has a beta of 0.9 The Treasury bil rate is 4%, and the market isk premium is estimated at 8%. Company's capital structure is 30% debt paying a 5% interest rate, and 70% equity. Company pays tax at 40%. 1. What is Company's cost of equity capital? 2. What is its WACC? 3. lfCompany is presented with a normal project with an internal rate of retum of 12%, should it accept the project? 4. The total book value of Company's eq y s $10 million, and book value per share is $20. The stock has a market to book of 1.5 and the cost of equity is 15%. The firm s bonds have aface value of $5 millon and sell at a price of 110% of face value. The yield to maturity on the bonds is 9%, and the firm's tax rate is 40%. Find the company's WACC. 5. Company is afirm with all-equity firanong. Its equity beta is 080. The Treasury bil rate is 4%, and the market nsk premum is expected to be 10%. 1. What is Company's asset bela? 2. What is Company's WACC? 6. The following table presents information for Company. Calculate the company cost of capital. Ignore taxes 300,000 Long-term debt outstanding Current yield to maturity on debt Number of shares of common stock 8% 10,000 $50 Price per share Book value per share Expected rate of return on stock $25 15%

Explanation / Answer

As per rules I will answer the first 4 subparts of the question

1: Cost of equity = Rf + Beta*E(Rp)

= 4%+ 0.9*8%

= 11.2%

2:Cost of debt = 5%*(1-Tax)

= 5%*(1-40%)

= 3%

WACC= 3%*30% + 11.2%*70% = 8.74%

3: Yes, Since the Cost of funds is 8.74% and returns are 12%, returns are >cost which means profits.

4:Market value of equity = 1.5*Book value

= 1.5*10 m = $15 million

Market value of debt = 5m*110% = $5.5m

Total value= $15m + 5.5m = $20.5m

Cost of debt = 9%*(1-Tax)

= 9%*(1-40%) = 5.4%

WACC= 15%*15/20.5 + 5.4%*5.5/20.5

= 8.74%

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