DATA: -The expected return on the market is 12% -The risk-free rate is 3.5% -Don

A. C. Cost Of Equity(Ke) = Rf+Beta(Rm-Rf) Rf Risk Free rate = 3.5+1.6*(12-3.5) Rm Return on market = 17.10 Thus,Cost of equity is 17.1%

ID: 2753130 • Letter: D

Question

DATA:

-The expected return on the market is 12%

-The risk-free rate is 3.5%

-Donuts R Us has a current stock price of $65. There are 15 million shares outstanding. The beta for the stock is 1.6

-Donuts R Us has a plowback ratio of 40%

-Donuts R Us has 3 different bonds issued as follows:

1. 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.

2. 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.

3. 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.

-Donuts R Us has an average tax rate of 30%

-Donuts R Us has no preferred stock

A) What is the cost equity for Donuts R Us?

B) What is the bond value of the 8% coupon bonds outstanding? What are current yield and capital gains yield?

C) What is bond value for the zero-coupon bonds? What are current yield and capital gains yield?

D) What is the cost of debt for Donuts R Us?

E) Calculate WACC using market values to obtain weights.

Cost Of Equity(Ke) = Rf+Beta(Rm-Rf) Rf Risk Free rate = 3.5+1.6*(12-3.5) Rm Return on market = 17.10 Thus,Cost of equity is 17.1%

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