Company A has 20,000 bonds outstanding, each with a face value of $1,000. 12,000 of the...

 

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Company A has 20,000 bonds outstanding, each with a face value of $1,000. 12,000 of the 20,000 bonds pay a semi-annual coupon of 8% p.a. with 10 years left to maturity and an effective annual yield to maturity of 10%. 8,000 of the 20,000 bonds pay an annual coupon of 9% p.a. with 12 years left to maturity and an effective annual yield to maturity of 11%. The most recent coupon for both types of bonds have just been paid. Effective tax rate is 30%. A has 10 million ordinary shares outstanding which are currently trading at $5 per share. A's beta is 1.2, the risk-free rate is 3%, and the expected return on the market portfolio is 15%. Using the capital asset pricing model to estimate the cost of equity, what is A's after-tax weighted average cost of capital? Company A has 20,000 bonds outstanding, each with a face value of $1,000. 12,000 of the 20,000 bonds pay a semi-annual coupon of 8% p.a. with 10 years left to maturity and an effective annual yield to maturity of 10%. 8,000 of the 20,000 bonds pay an annual coupon of 9% p.a. with 12 years left to maturity and an effective annual yield to maturity of 11%. The most recent coupon for both types of bonds have just been paid. Effective tax rate is 30%. A has 10 million ordinary shares outstanding which are currently trading at $5 per share. A's beta is 1.2, the risk-free rate is 3%, and the expected return on the market portfolio is 15%. Using the capital asset pricing model to estimate the cost of equity, what is A's after-tax weighted average cost of capital?

Answer rating: 100% (QA)

SOLUTION First we need to calculate the aftertax cost of debt for each type of bond The aftertax cost of debt is given by Aftertax cost of debt Yield ... View the full answer