• LeeBurly’s capital structure consists of 40% debt and 60% common stock. • LeeB
ID: 2667959 • Letter: #
Question
• LeeBurly’s capital structure consists of 40% debt and 60% common stock.• LeeBurly has 25-year, 12% annual coupon bonds that have a face value of $1,000 and sell for $1,252.
• LeeBurly uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 5% and the market risk premium is 6%. LeeBurly’s common stock has a beta of 1.6. LeeBurly’s tax rate is 40%.(7 points)
a. What is the company’s after-tax cost of debt?
b. What is the company’s cost of common equity?
c. What is the company’s weighted average cost of capital (WACC)?
Explanation / Answer
Using a financial calculator the yield to maturity (pretax cost of debt) on the bonds is 9.36%. Using the CAPM the cost of equity is .05 +1.6*.06= 14.6%. The after tax cost of debt is (1-.4)*9.36= 5.616% So the WACC is .4*5.616 +.6*14.6= 11.01%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.