Risk-free rate 0.016 Market rate 0.078 Tax rate 30% Common stock Loan $2,000,000 Interest rate 0.056...

Transcribed Image Text:

Risk-free rate 0.016 Market rate 0.078 Tax rate 30% Common stock Loan $2,000,000 Interest rate 0.056 Beta 1.00 7 yr, B rated bond issue Shares outstanding 310,000 Price per bond Price per share $1,100 $17.50 Number 1,210 issued Use the chart above to answer questions 1-6. Refer to the ratings chart in the slides to find the yield to maturity on the bond 1. What are the weights the bond issue and loans contribute to the company's overall debt? 2. What is the after-tax weighted average cost of debt? 3. Using the CAPM, what is the required return on the company's common stock? 4. What is the market value of the firm's common stock? 5. What are the weights the debt and equity contribute to the company's capital? 6. What is the weighted average cost of capital? 7. If the firm has a project with an expected return of 5%, should the firm invest in the project? Justify your answer. Risk-free rate 0.016 Market rate 0.078 Tax rate 30% Common stock Loan $2,000,000 Interest rate 0.056 Beta 1.00 7 yr, B rated bond issue Shares outstanding 310,000 Price per bond Price per share $1,100 $17.50 Number 1,210 issued Use the chart above to answer questions 1-6. Refer to the ratings chart in the slides to find the yield to maturity on the bond 1. What are the weights the bond issue and loans contribute to the company's overall debt? 2. What is the after-tax weighted average cost of debt? 3. Using the CAPM, what is the required return on the company's common stock? 4. What is the market value of the firm's common stock? 5. What are the weights the debt and equity contribute to the company's capital? 6. What is the weighted average cost of capital? 7. If the firm has a project with an expected return of 5%, should the firm invest in the project? Justify your answer.