Question $1$

Irvine Hall Condominiums $($IHC$)$ is a major producer of mattresses and plastic goods. You

are the Vice$-$President of Finance. This is a position with high visibility and an opportunity

for rapid advancement, providing you make the right decisions. Your boss asked you to

estimate the weighted average cost of capital for the company. The following is the balance

sheet and some information about IHC.

Assets

Current assets

Net plant, property, and equipment

Total Assets

Liabilities and Equity

Accounts payable

Accruals

Current liabilities

Long term debt $(40,000$ bonds, $$1,000$ face value$)$

Total liabilities

Common Stock shares$)$

Retained Earnings

Total shareholders' equity

Total liabilities and shareholders' equity

$[$$$38,000,000],[$$$101,000,000]$

$$139,000,000$

$$10,000,000$

$$9,000,000$

$$19,000,000$

$\frac{\text{\$}40,000,000}{\text{\$}59,000,000}$

$$30,000,000$

$$50,000,000$

$$80,000,000$

$$139,000,000$

You check The Wall Street Journal and see that IHC stock is currently selling for $$7\mathrm{.}50$ per

share and that IHC bonds are selling for $$889\mathrm{.}50$ per bond. These bonds have a $7\mathrm{.}25$ percent

annual coupon rate, with semi$-$annual payments. The bonds mature in twenty years. The

beta for your company is approximately equal to $1\mathrm{.}1.$ The yield on a $6-$month Treasury bill is

$3\mathrm{.}5$ percent and the yield on a $20-$year Treasury bond is $5\mathrm{.}5$ percent. The expected return on

the stock market is $11\mathrm{.}5$ percent, but the stock market has had an average annual return of

$14\mathrm{.}5$ percent during the past five years. IHC is in the $40$ percent tax bracket.

$($i$)$ Using the CAPM approach, what is the best estimate of the cost of equity

for IHC?

$($ii$)$ What is the best estimate for the after$-$tax cost of debt for IHC?

$($iii$)$ What is the best estimate for the weights to be used when calculating

Weighted Cost of Capital $($WACC$)?$

$(3$ marks$)$

$($iv$)$ What is the best estimate of the WACC for IHC?

$(4$ marks$)$

$($v$)$ What is the current yield on the bond?

$(3$ marks$)$