A new company called 99 cent sushi has 1000 shares outstanding that sell for $1.

Question

A new company called 99 cent sushi has 1000 shares outstanding that sell for $1.8 each and have a beta of 1.2. The stock market is doing rather well and the market return is 15% while the risk free rate is 3.5%. 99 cent sushi has one outstanding bond issued with a Face Value of 2000 and a coupon rate of 10%. The bond has 10 years to maturity and is currently being traded for 108% of its face value. The company is required to pay at 35% tax rate.

Calculate the following:

A) The cost of Equity

:B)The cost of Debt:

C)The capital structure weights (the percentage of the companys combined value that is from equity and debt)

D) The weighted average cost of capital for the company

Explanation / Answer

A) Cost of equity as per CAPM = risk free rate+beta*(market return-risk free rate) = 3.5+1.2*(15-3.5) = 17.30% B) Cost of debt: YTM of the bond, using a financial calculator = 8.78% assuming semi-annual interest payment. After tax cost of debt = 8.78*(1-0.35) 5.71% C) Capital structure weights are given below: Market Capital structure Value Weights Equity (1000*1.8) 1800 45.45% Debt = 2000*108% = 2160 54.55% 3960 D) WACC = 17.30*45.45%+5.71*54.55% = 10.98%

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