A. John & Son Canada Corp has the following capital structure. Security 1) 6.0% Bond---30million 2) 5.5%
Question:
A. John & Son Canada Corp has the following capital structure.
Security
1) 6.0% Bond---30million
2) 5.5% Straight bond ----10 million
3) 7.5% Preferred stock ----10 million
4) Common stock -----50 million
Total $100 million
The 6% bond is a callable bond and yield to call (YTC) of this bond is 6.75%. The straight bond which has a coupon rate of 5.5% has a yield of 6.45%. The preference share of John & Son is currently trading at $95. The common stock of John & Son Canada Corp has a beta of 1.25. The T-bill rate is 2% and the return on the TSX composite index is 9%. The corporate tax rate is 35%.
i) Compute the cost of capital after tax for each source of financing (capital)? [6 marks]
ii) What is its WACC?
iii) If John & Son Canada Corp is evaluating an investment proposal that provides an internal rate of return (IRR) of 12%, should the company go with the proposal assuming that the WACC remains constant?
Expert Answer:
Capital Structure Weights 6 Bond 30 million 30 55 straight bond 10 million 10 75 ... View the full answer
