A company has two bonds outstanding, both with semiannual coupons. The first one has a coupon rate
Question:
A company has two bonds outstanding, both with semiannual coupons. The first one has a coupon rate of 3%, a maturity of 15 years and a YTM of 9%. 39,000 of these bonds are outstanding. The second bond has a coupon rate of 9%, a maturity of 20 years and a price of $1,346.72. The book value of this issue is $19 million.
The company has no preferred stock, but 6 million shares of common stock outstanding, trading at $65, and its equity beta is 1.6. The yield on treasuries is 7% and the expected market risk premium is 6%. The marginal tax rate is 34%. The target capital structure weight for equity is 1 percentage points larger than the actual one.
a) What is the cost of equity?
b) What is the before-tax cost of debt for bond 1?
c) What is the before-tax cost of debt for bond 2?
d) What is the market value of bond issue 1?
e) What is the market value of bond issue 2?
f) What is the before-tax cost of debt overall?
g) What is the target capital structure weight for equity?
h) What is the weighted average cost of capital?
Expert Answer:
