Ahmed Company has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred...
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Ahmed Company has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $5,000 each. The common stock currently sells for $34 per share (Par value= $10) and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Ahmed Company tax rate is 36 percent. a. What is the firm's market value capital structure? b. If Ahmed Company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? If we use debt 35%, preferred stock 15% and common stock 50%, what will be the discount rate by assuming same cost of each financing? Ahmed Company has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $5,000 each. The common stock currently sells for $34 per share (Par value= $10) and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Ahmed Company tax rate is 36 percent. a. What is the firm's market value capital structure? b. If Ahmed Company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? If we use debt 35%, preferred stock 15% and common stock 50%, what will be the discount rate by assuming same cost of each financing?
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SOLUTION a To determine the firms market value capital structure we need to calculate the market values of each component of the capital structure Mar... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Posted Date:
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