Company A has these servers represent a big investment and have a useful life of around 5 years. A has $5 million in publicly traded bonds, paying a coupon rate of 6% and trading at par. A also has equity that is privately held by its founder as well as some venture capital (VC) investors. The book value of this equity, as of the end of the last quarter, was $6 per share, and it has 500,000 shares outstanding. The VC firm that has been advising A has argued that, were A to go public, its value would likely be around $14 per share. You also have the following competitors’ data available (these competitors are publicly traded):

Company	Number of shares	Price per share	Book value of debt	Yield on debt	Beta (of equity)
Eye Share	1,000,000	$12.00	$4,000,000	7%	1.9
Your space	5,000,000	$16.00	$2,000,000	6.5%	1.3

The most recent 5-year government bond rate, as of today, is 5%. The historical average since the early 1930s for the 5-year government bond is 3.5%.

Additionally, you estimate that the historic market risk premium is about 7.5%, measured from the early 1930s to the most recent data. The tax rate is 34%.

a. What is company A leverage ratio (i.e., D/V) based on book values? What is company A’s leverage ratio based on estimated market values?

b. Calculate the required return to equity for company A.

c. Calculate the cost of capital for company A.

Answer rating: 100% (QA)

a Company As leverage ratio based on book values Debt D 5 million bonds Equity E 500000 shares x 6 p... View the full answer