Use the Questions below to refer to the following data - The expected return on
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Question
Use the Questions below to refer to the following data
- The expected return on the market is 12%
- The risk-free rate is 3.5%
- the corporation has a current stock price of $65. There are 15 million shares outstanding. The beta for the stock is 1.6
- The corporation has a plowback ratio of 40%
- The corporation has three difference bond issues as follows:
-->8% coupon bonds with face value of $1000 that mature in 10 years. These bonds have a yield to maturity of 6%. There are 250,000 of these bonds
--> zero-coupon bonds with face value of $1000 that mature in 3 years. These bonds have a yield to maturity of 3%. There are 300,000 of these bonds
--> 10% coupon bonds with face value of $1000 that mature in 15 years and are currently trading at face value. There are 500,000 of these bonds.
- The corporation has an average tax rate of 30%
- The corporation has no preferred stock.
1. What is the cost of equity for the corporation?
2. What is the bond value for the 8% coupon bonds outstanding? What are current yield and capital gains yield?
3. What is bond value for the zero-coupon bonds? What are current yield and capital gains yield?
4. What is the cost of debt for the corporation?
5. Caluclate WACC using market values to obtain weights.
Explanation / Answer
Solution:
1,
Cost of Equity
Cost of Equity , ke = Risk free return + Beta * ( Market risk - Risk free return )
Risk free return = 3.5 %
Beta = 1.60
Market risk = 12 %
Cost of Equity , ke = 3 % + 1.60 * ( 12 % - 5 % )
Cost of Equity , ke = 14.7%
2.
a.
b.
c.
Value of Bond = Present value of Interest + Present Value of Redeemable value Par value 1000 Coupon payment - 8 % 80 Yield to maturity 6% Years left to maturity 10 Present value of Interest Coupon payment - 8 % 80 PVAF @ 6 % for 10 years 7.36 Present value of Interest 588.8 Present value of Redeemable value Par value 1000 PVIF @ 6 % for 10 years 0.5584 Present value of Redeemable value 558.4 Value of Bond 1147.2Related Questions
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