XYZ Co has 7000 units of bonds outstanding. Each unit has $100 face value, 7% coupon...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
XYZ Co has 7000 units of bonds outstanding. Each unit has $100 face value, 7% coupon rate with semi-annual payments, and 20 years to maturity. The risk-free rate is 3%, default risk premium for its bond is 1%, maturity risk premium is 1.5%.XYZ has a tax rate of 20%. XYZ Co has 20,000 shares of common stocks. The stock has a standard deviation of return of 20%. A stock market index has a standard deviation of return of 25%. The correlation coefficient between stock return and stock stock index return is 0.92. The stock is expected to pay dividend of $6 in one year and its expected price in one year is $80. The risk-free rate is 3%. The stock market index has an expected return of 12%. 1. Determine the before tax cost of debt, and the after tax cost of debt. 2. Determine the value of each unit of bond, and the total market value of all units of bonds. 3. Determine the beta of the stock, and the cost of equity of the stock using the capital asset pricing model. 4. Determine the value of each share of stock, and the total market value of all shares of stock. 5. Determine how much debt and how much equity (capital structure) the firm has using the total market vale of stocks and bonds. Determine the weighted average cost of capital. XYZ Co has 7000 units of bonds outstanding. Each unit has $100 face value, 7% coupon rate with semi-annual payments, and 20 years to maturity. The risk-free rate is 3%, default risk premium for its bond is 1%, maturity risk premium is 1.5%.XYZ has a tax rate of 20%. XYZ Co has 20,000 shares of common stocks. The stock has a standard deviation of return of 20%. A stock market index has a standard deviation of return of 25%. The correlation coefficient between stock return and stock stock index return is 0.92. The stock is expected to pay dividend of $6 in one year and its expected price in one year is $80. The risk-free rate is 3%. The stock market index has an expected return of 12%. 1. Determine the before tax cost of debt, and the after tax cost of debt. 2. Determine the value of each unit of bond, and the total market value of all units of bonds. 3. Determine the beta of the stock, and the cost of equity of the stock using the capital asset pricing model. 4. Determine the value of each share of stock, and the total market value of all shares of stock. 5. Determine how much debt and how much equity (capital structure) the firm has using the total market vale of stocks and bonds. Determine the weighted average cost of capital.
Expert Answer:
Answer rating: 100% (QA)
1 Before Tax Cost of Debt The beforetax cost of debt can be calculated using the formula Before Tax Cost of Debt Coupon Rate Given that the coupon rate is 7 the beforetax cost of debt is 7 2 After Tax ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
1. What type of product would be considered to be a prospect for powder metallurgy manufacture? 2. What were some of the earliest powder metallurgy products? 5. What are some of the primary market...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
CoursHeroTranscribedText: A 5-year loan in the amount of $48,000 is to be repaid in equal annual payments. What is the remaining principal balance after the third payment if the interest rate is 5...
-
A set of 2M biorthogonal signals is obtained from a set of M orthogonal signals by augmenting it with the negative of each signal in the set. (a) The extension of orthogonal to biorthogonal signals...
-
Woolard Inc. has taxable income in 2015 of $150,000 before any depreciation deductions (179, bonus, or MACRS) and acquired the following assets during the year: Asset Placed in Service Basis Office...
-
Gullo Company reported these figures for 2018 and 2017: Requirements 1. Compute Gullo Company's earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round...
-
How can the lifecycle approach be used to maximise return from a product?
-
Monterey Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,000 per year. The vans' combined purchase price is $93,000. The expected life and...
-
Q1. Which of the following best describes vertical analysis? A. Displays financial ratios in a vertical (up/down) format. B. Shows a trend analysis of the same line item from one year to the next. C....
-
Identifying financing, investing, and operating transactions Required For a company like Canadian Tire Corporation, provide two examples of transactions that you would classify as financing,...
-
Vaughn Company manufactures two products, Regular and Supreme. Vaughn's estimated overhead costs consist of machining. $1200000; and assembling, $500000. Information on the estimated use of the cost...
-
Imagine Tom a young adult who has been registered as unemployed since he left high school a little over a year ago. He does not think there are any job prospects and has given up looking for work. He...
-
Discuss the healthcare system and how it relates to medical information systems. There is no credit for late posts. Make sure to review the Discussion grading rubric before making any posts...
-
Write short notes a) Three differences between Managerial Accounting and Financial accounting. b) Three Use of CVP analysis c) Different types of overheads with examples d) Activity Based costing
-
Identify and graph the polar equation r = 7-9 sin 0.
-
Applicants can earn up to 3 points if your proposal provides clearly defined purpose and goals, and provides a comprehensive, achievable plan to improve nutritional quality of school meals and move...
-
Complete a School Data Summary: Identify who in the building can help you (data expert or person who can help you interpret the data) Identify SIP goals Identify trends from data reports from...
-
In exchange for land, the company received a 12-month note on January 1. The face amount of the note is $1,000, and the stated rate of interest is 13%, compounded annually. The 13% rate is equal to...
-
Are there conditions under which a firm might be better off if were to choose a machine with a rapid payback rather than one with larger NPV? Explain.
-
Assume that the real risk-free rate of return, r*, is 3 percent and it will remain at that level far into the future. Also assume that maturity risk premiums on Treasury bonds increase from 0 percent...
-
The Meyer Company must arrange financing for its working capital requirements for the coming year. Meyer can (a) Borrow from its bank on a simple interest basis (interest payable at the end of the...
-
In the U.S. the Federal Bureau of Investigation (FBI) uses a Uniform Crime Reporting (UCR) system to track violent crimes (like murder) and property crimes (such as theft of motor vehicles or...
-
Assume that you own and manage a small clothing store. A. What kinds of financial information would you want to run your business? B. What kinds of nonfinancial information would you want (for...
-
One of the first U.S. major industries to be regulated was the railroads. Farmers and manufacturers depended on railroads to get their products to market, and often there was only one railroad...
Study smarter with the SolutionInn App