Makai Metal Corp has 9 Million shares of common stock outstanding and 340,000 6%
ID: 2785274 • Letter: M
Question
Makai Metal Corp has 9 Million shares of common stock outstanding and 340,000 6% semi-annual bonds outstanding, par value 1,000 each. Common stock currently sells for $38 per share and has a beta of 1.5, and the bonds have 20 years to maturity and sell for 119% of par. The market risk premium is 7.8% T-Bills are yielding 3%, and the companies tax rate is 36%
A.What is the firms market value capitol structure?
Debt Market Value Weight?
Equity Market Value Weight?
B. If the company is evaluating a new investment project that has the same risks as the firms typical projects, what rate should the firm use to discount the projects cash flows?
Discount rate=?
Explanation / Answer
no of shares outstanding
market price per share
market value of equity = no fo share outstanding* market price
market value Weight = value of source/total value of firm
Market value of equity share
9000000
38
342000000
.4580
Matket value of debt
340000
119% of par value = 1190
404600000
.5420
total Market value of company
value of equity+ value of debt
746600000
cost of capital of equity
risk free rate+(market risk premium)*beta
3+(7.8)*1.5
14.7
cost of debt before tax
interest+(par value-market value)/years to maturity / (par value+market value)/2
30+(1000-1190)/40 / (1000+1190)/2
25.25/1095
4.6118
cost of debt after tax = before tax rate*(1-tax rate)
4.6118*(1-.36)
2.951552
weighted average cost of capital
Source
Investment
weight
cost of source
cost *weight
debt
404600000
0.541923
2.951552
1.599515
equity
342000000
0.458077
14.7
6.733726
746600000
weighted average cost of capital
sum of weight*cost
8.333241
Project should be discounted at
8.33%
no of shares outstanding
market price per share
market value of equity = no fo share outstanding* market price
market value Weight = value of source/total value of firm
Market value of equity share
9000000
38
342000000
.4580
Matket value of debt
340000
119% of par value = 1190
404600000
.5420
total Market value of company
value of equity+ value of debt
746600000
cost of capital of equity
risk free rate+(market risk premium)*beta
3+(7.8)*1.5
14.7
cost of debt before tax
interest+(par value-market value)/years to maturity / (par value+market value)/2
30+(1000-1190)/40 / (1000+1190)/2
25.25/1095
4.6118
cost of debt after tax = before tax rate*(1-tax rate)
4.6118*(1-.36)
2.951552
weighted average cost of capital
Source
Investment
weight
cost of source
cost *weight
debt
404600000
0.541923
2.951552
1.599515
equity
342000000
0.458077
14.7
6.733726
746600000
weighted average cost of capital
sum of weight*cost
8.333241
Project should be discounted at
8.33%
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