El Paso Barns is a manufacturer of large livestock barns. The company has been in business for
Question:
El Paso Barns is a manufacturer of large livestock barns. The company has been in business for over 20 years and is publicly held.
They have just hired you as their new financial analyst and have asked you to work on the follow project:
They are currently being financed with both debt and equity, but senior management is confused about their total cost of capital. You need to compute the weighted average cost of capital for the company. You have the following information:
• The company has 50,000 shares of stock outstanding. The current selling price is $15. Based on historical returns, you believe the Beta for this stock should be about 1.5. The current risk free rate is 6% and the expected return on the market is 12%.
• The company has also issued 400 bonds that are selling for 125% of par. The bonds have 24 years remaining to maturity and carry a coupon rate of 8%.
• Their marginal tax rate is 40%.
1. Compute the cost of equity for El Paso Barns (25 pts). Be sure to show your work in ALL answers!
2. Compute the before-tax cost of debt for EPB (remember you will need to compute the yield to maturity to find the before-tax cost of debt)
3. Compute the after-tax cost of debt for EPB
4. Compute the weights you should use for equity and debt.
5. Compute the weighted average cost of capital for EPB.
Cost Of CapitalCost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
1 To find the cost of equity we have to adopt the Capital Asset Pricing Model CAPM As per CAPM Cost ...View the full answer
