Calculate the cost of equity for the company.
Calculate the price of the company’s stock today.
Calculate the yield to maturity of Bond 1.

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Cansın has been working in a multinational company, B&B International, for the last five years. The company is planning to open a new division in Paris. Cansın and her manager are responsible for determining the appropriate discount rate for this new division. B&B Int. has a common stock and two different bonds outstanding in the market. Common Stock: The beta of the company's stock is 1.3. The risk-free rate is 3%, and the market risk premium is 9% in this economy. B&B has just distributed a dividend of $2 per share. The dividends of this company will grow at 15% per year for the next three years. After that, the growth in dividends will decrease to 5% per year and stays at that level forever. There are 10,000,000 shares outstanding. Bond 1: It is issued 7 years ago with an original maturity of 15 years. It has $1,000 par value. It has 9% coupon rate with semiannual coupon payments and selling for $972.417 in the market. There are 100,000 bonds outstanding. Bond 2: It is issued 1.5 years ago with an original maturity of 20 years. It has $10,000 par value with 12% coupon rate and semiannual coupon payments. It is trading at a yield to maturity of 11% in the market today. There are 15,000 bonds outstanding. B&B Int. is in 35% tax bracket. Cansın has been working in a multinational company, B&B International, for the last five years. The company is planning to open a new division in Paris. Cansın and her manager are responsible for determining the appropriate discount rate for this new division. B&B Int. has a common stock and two different bonds outstanding in the market. Common Stock: The beta of the company's stock is 1.3. The risk-free rate is 3%, and the market risk premium is 9% in this economy. B&B has just distributed a dividend of $2 per share. The dividends of this company will grow at 15% per year for the next three years. After that, the growth in dividends will decrease to 5% per year and stays at that level forever. There are 10,000,000 shares outstanding. Bond 1: It is issued 7 years ago with an original maturity of 15 years. It has $1,000 par value. It has 9% coupon rate with semiannual coupon payments and selling for $972.417 in the market. There are 100,000 bonds outstanding. Bond 2: It is issued 1.5 years ago with an original maturity of 20 years. It has $10,000 par value with 12% coupon rate and semiannual coupon payments. It is trading at a yield to maturity of 11% in the market today. There are 15,000 bonds outstanding. B&B Int. is in 35% tax bracket.

Answer rating: 100% (QA)

Cost of equity can be calculated with CAPM formula which is as follows Cost of equity Risk free rate ... View the full answer