You are a manager for Humana Inc., and you are trying to determine the appropria
ID: 2790134 • 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 Market Price Quote (per bond) Total Book Value YTM (in millions) $500 million, 720% due June 15. 20 % 500 104 2.240% $300 million, 6.30% due August 1, 2018 6.300% 300 101 2.420% 400 million, 2.625% due 252 % 400 98 3.700% r1.2019 $600 million, 315% due 3150% 600 103.12 2.480% December 1, 2022 600 million, 3.85% due October 3.850% 600 98 3.230% 2024 $250 million, 815% due June 15 2038 $400 million, 4.625% due December 1, 2042 $750 million, 4.95% due October 8150% 250 148.22 5 750% 4.625% 400 99.65 4.650% 4.950% 750 100 4.950% 2044 The market price for one share of common stock is $255.27, and there are 146.280 million shares outstanding what is Humana's debt-to-equity (D/E) ratio? Enter your answer as a decimal, rounding to the nearest ten-thousandth. (For example, write "1.23%" as "0123")Explanation / Answer
Market Value of Debt = 5,000,000 *104 + 3,000,000 *101 + 4,000,000 * 98 + 6,000,000*103.12 + 6,000,000 *98 + 2,500,000 *148.22 + 4,000,000 *99.65 + 7,500,000 *100 = 3,940,870,000
Market Value of Equity = 255.27 * 146,280,000 =37,340,895,600
Debt to Equity = 3,940,870,000/37,340,895,600 = 0.1055
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