11. Zip Inc. produces nano-tech equipment. It has a debt-equity ratio of 0.5. The beta of its stock is 1.30. Its bonds pay a semiannual coupon of 9% and have 3.5 years to maturity. The next coupon date is in 6 months. The bonds trade at 97% of par. ABC Inc's management considers building a new plant. Management assumes that the beta of this project is equal to the company beta. The riskless rate is 5% and the market risk premium is 7%. ABC Inc also has retained earnings of $20 mil in its balance sheet. The corporate tax rate is 30%.

a) Determine ABC Inc's cost of debt.

b) Determine ABC Inc's cost of equity.

c) Determine the after-tax annual discount rate for the plant.

Answer rating: 100% (QA)

To solve this problem we need to calculate the cost of debt cost of equity and the aftertax annual d... View the full answer