An Irish firm has issued a 10 year 50 million bond which is trading at 96.45,...

 

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An Irish firm has issued a 10 year 50 million bond which is trading at 96.45, the bond's coupon is 2.90% and the yield of the bond is 3.3%. The yield on risk-free government bonds is 1%. The firm has 1,250,000 shares outstanding which are trading at 85 per share. The company's beta is 0.85 and the expected return of the ISEQ Index (the market return) is 12%. The firm is expected to pay a dividend of 6 per share and its growth rate is estimated to be 4%. The corporate tax rate for the firm is 15%. (5 marks) (10 marks) a. What is the firm's cost of debt and cost of equity? b. What is the firm's weighted average cost of capital? Describe the reasons why investors and firms calculate a firm's weighted average cost of capital. (15 marks) An Irish firm has issued a 10 year 50 million bond which is trading at 96.45, the bond's coupon is 2.90% and the yield of the bond is 3.3%. The yield on risk-free government bonds is 1%. The firm has 1,250,000 shares outstanding which are trading at 85 per share. The company's beta is 0.85 and the expected return of the ISEQ Index (the market return) is 12%. The firm is expected to pay a dividend of 6 per share and its growth rate is estimated to be 4%. The corporate tax rate for the firm is 15%. (5 marks) (10 marks) a. What is the firm's cost of debt and cost of equity? b. What is the firm's weighted average cost of capital? Describe the reasons why investors and firms calculate a firm's weighted average cost of capital. (15 marks)

Answer rating: 100% (QA)

a To calculate the firms cost of debt and cost of equity we need to use the following formulas Cost of Debt Yield of the Bond 1 Tax Rate Cost of Equit... View the full answer