You are a manager for Humana Inc., and you are trying to determine the appropria
ID: 2790118 • Letter: Y
Question
You are a manager for Humana Inc., and you are trying to determine the appropriate discount rate to use in valuations of average risk project proposals for the company. You have the following information: YTM on 10-year Treasury bill: 2.359% Beta on common stock: 0.58 Expected return on market portfolio: 8.5% Additionally, you collected the following information from Humana's most recent annual financial disclosure and market prices on current bond issues Bond issue Coupon Rate Total Book Value Market Price Quote YTM (in millions) (per bond) 7200% 104 $500 million, 7.20% due June 15. 2018 $300 million, 6.30% due August 1, 2018 $400 million, 2.625% due October 1, 2019 $600 million, 315% due December 1, 2022 $600 million, 3.85% due October 1, 2024 $250 million, 8.15% due June 15 2038 $400 million, 4.625% due December 1, 2042 $750 million, 4.95% due October 1, 2044 500 2.240% 6.300% 300 101 2.420% 2.625% 400 98 3.700% 3.150% 600 103.12 2.480% 3.850% 600 98 3.230% 8.150% 250 148.22 5.750% 4.625% 400 99.65 4.650% 4.950% 750 100 4.950% The market price for one share of common stock is $255.27, and there are 146.280 million shares outstanding What is Humana's cost of debt on a market value basis? Enter your answer as a decimal, rounding to the nearest ten-thousandth. (For example, write "1.23%" as "0123")Explanation / Answer
Market Value for each bond = Total Book Value x Market Price (%)
For first bond, Market value = 500 x 104% = 520 and so on...
Cost of debt on a market value basis = Sum of Market Value x YTM / Sum of market Value
= (520 x 2.24% + ... + 750 x 4.95%) / 3940.87
= 3.67%
Bond Market Value YTM 1 520 2.24% 2 303 2.42% 3 392 3.70% 4 618.72 2.48% 5 588 3.23% 6 370.55 5.75% 7 398.6 4.65% 8 750 4.95% Total 3940.87 3.67%Related Questions
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