74 Assume that you have been hired as a consultant by Chem All, a major producer

Question

74 Assume that you have been hired as a consultant by Chem All, a major producerof chemicals and plastics, including plastic grocery bags,styrofoam cups, and fertilizers, to estimate the firm's weightedaverage cost of capital. The balance sheet and some other information are provided below. The stock is currently selling for $15.25 per share, and itsnoncallable $1,000 par value, 20-year, 7.25% bonds with semi-annual payments are selling for $875.00. There are 40,000 bonds, $1,000 par value and 10,000,000 shares of common stock. The company's balance sheet shows no other debt and no preferred stock. The beta is 1.25, the yield on a 20-year Treasury bond is 5.50%. The required return on thestock market is 11.50%, and the firm's tax rate is 40%. 74. What is the best estimate of the after-tax cost of debt? 4.64% 4.88% 5.14% 5.40% 75. Based on the CAPM, what is the firm's cost of equity? 11.15% 11.73% 12.35% 13.00% 76. Using market values, which of the following is the best estimate for the weight of the debt for us in calculating the WACC? 18.67% 19.60% 20.58% 21.61% 77. What is the best estimate of the firm's WACC? 10.85% 11.19% 11.53% 11.88%

Explanation / Answer

Hi, Please find the answers as follows" a) N = 2 Years = 40 PV = -875 PMT = (Coupon rate* Par)/2 = 36.25 FV = Par value 1000 Yield = I/YR, which when solved will give the value of 4.28% Before-tax cost of debt = rd = yield*2 = 8.57% After-tax cost of debt = rd(1 - T) = 5.14% b) CAPM = 5.5 + 1.25*(11.5 - 5.5) = 13% c) Bond price 875 Number of bonds 40000 MV of debt = 35000000 Stock price = 15.25 Shares outstanding 10000000 MV of equity = 152,500,000 Total MV = Debt + Equity = 187500000 Weight debt = wd = D/Total MV = 18.67% Thanks, Aman

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