for the next five years and then slow down to 5% per year as the market for its
ID: 2767303 • Letter: F
Question
for the next five years and then slow down to 5% per year as the market for its sherry develops and competition steps in. It has a current cost of debt of 6% and pay income taxes 35%. Its cost of equity based on the Capital Asset Pricing Model is 8%. Firms of this size and credit quality normally have a debt to equity ratio of 50:50, what is the current price of its common stock given this information? Several years ago Chorizo de Pamplona Limitada sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation?Explanation / Answer
Par Value = $1,000
Year to maturity = 20
Annual coupon = $70
Semi-annual coupon = $35 (70/2)
Period to meturity = 20*2 = 40
Current Price = 950
Tax Rate = 40%
Using excel, before-tax YTM = rate(40,35,-950,1000) = 3.74%
Before tax annual YTM = 3.74% * 2 = 7.49%
So, after ta YTM = 7.49% * (1-40%) = 4.49%
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