Knick Inc. has two bonds outstanding, and both pay semi-annual coupons. The first bond has 18...

 

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Knick Inc. has two bonds outstanding, and both pay semi-annual coupons. The first bond has 18 years to maturity, 16% coupon rate, and $720,000 face value. It is trading at 110 (110% of face value). The second bond has 10 years to maturity, 8% coupon rate, and $880,000 face value. It is trading at 13.5% YTM. Knick has 150,000 shares outstanding with beta of 1.25. The expected dividend per share is $4 next year and will grow at 2% per year. The market return is 15% and the risk-free rate is 3%. Corporate tax is 25%. a) Calculate the cost of equity and the equity value. b) Calculate the after-tax cost of debt. c) Calculate the WACC. d) Estimate the unlevered beta. e) Assume that Knick changes its debt-to-equity ratio to 0.2 and its cost of debt decreases 40 bps, estimate its new cost of equity and WACC. Knick Inc. has two bonds outstanding, and both pay semi-annual coupons. The first bond has 18 years to maturity, 16% coupon rate, and $720,000 face value. It is trading at 110 (110% of face value). The second bond has 10 years to maturity, 8% coupon rate, and $880,000 face value. It is trading at 13.5% YTM. Knick has 150,000 shares outstanding with beta of 1.25. The expected dividend per share is $4 next year and will grow at 2% per year. The market return is 15% and the risk-free rate is 3%. Corporate tax is 25%. a) Calculate the cost of equity and the equity value. b) Calculate the after-tax cost of debt. c) Calculate the WACC. d) Estimate the unlevered beta. e) Assume that Knick changes its debt-to-equity ratio to 0.2 and its cost of debt decreases 40 bps, estimate its new cost of equity and WACC.

Answer rating: 100% (QA)

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