Monday's Technology Inc. has 800 bonds outstanding that are selling at $1,050 each. Bonds with similar...

 

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Monday's Technology Inc. has 800 bonds outstanding that are selling at $1,050 each. Bonds with similar characteristics are yielding a pretax 7.25 percent. The firm also has 25,000 shares of common stock outstanding. The stock has a beta of 1.05 and sells for $20 a share. The U.S. T-bill is yielding 3 percent, the market risk premium is 7 percent, and the firm's tax rate is 21 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense? 1. What are the weights of the different capital sources used by the firm? 2. What is firm's cost of equity? 3. What is the firm's weighted average cost of capital (WACC)? Monday's Technology Inc. has 800 bonds outstanding that are selling at $1,050 each. Bonds with similar characteristics are yielding a pretax 7.25 percent. The firm also has 25,000 shares of common stock outstanding. The stock has a beta of 1.05 and sells for $20 a share. The U.S. T-bill is yielding 3 percent, the market risk premium is 7 percent, and the firm's tax rate is 21 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense? 1. What are the weights of the different capital sources used by the firm? 2. What is firm's cost of equity? 3. What is the firm's weighted average cost of capital (WACC)?

Answer rating: 100% (QA)

1 To calculate the weights of the different capital sources we need to determine the market value of ... View the full answer