Question

Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions):
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 debt∕(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?


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  • CreatedApril 15, 2015
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