Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the
Question:
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In addition, you are provided the following information:
€¢ The debt is in the form of long-term bonds, with a coupon rate of 10%. The bonds are currently rated AA and are selling at a yield of 12% (the market value of the bonds is 80% of the face value).
€¢ The firm currently has 50 million shares outstanding, and the current market price is $80 per share.
The firm pays a dividend of $4 per share and has a price/earnings ratio of 10.
€¢ The stock currently has a beta of 1.2. The risk-free rate is 8%.
€¢ The tax rate for this firm is 40%.
a. What is the debt/equity ratio for this firm in book value terms? In market value terms?
b. What is the debtˆ•(debt + equity) ratio for this firm in book value terms? In market value terms?
c. What is the firm€™s after-tax cost of debt?
d. What is the firm€™s cost of equity?
e. What is the firm€™s current cost of capital?
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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a Book Value DebtEquity Ratio 25002500 100 Market Value of Equity 50 80 4000 Mark...View the full answer
