Assume that a company's stock price has an expected return of 15% and a standard deviation of 25%. The company is planning to issue bonds with a par value of $1,000 and a coupon rate of 7%. The bonds will mature in 5 years and pay interest semi-annually. The current market interest rate for similar bonds is 9%.

a) Calculate the current price of the bond.

b) If the company's tax rate is 30%, calculate the after-tax cost of debt.

c) Assume the company has a target capital structure of 40% debt and 60% equity. The current market value of the company's equity is $500,000, and the number of outstanding shares is 100,000. What is the company's weighted average cost of capital (WACC)?

Answer rating: 100% (QA)

The detailed answer for the above question is provided below a To calculate the current price of the bond we can use the present value formula P C x 1 ... View the full answer