Question: Typical problem progression.....CAT Co. is reviewing their capital structure. They have $1,000,000 in bonds at a cost to maturity of 11%, 75,000 shares of stock

Typical problem progression.....CAT Co. is reviewing their capital structure. They have $1,000,000 in bonds at a cost to maturity of 11%, 75,000 shares of stock at $20.00. Cost of equity is 16%. Tax 30%.

a. What is their cost of debt?

b. What is their cost of equity?

c. What is their WACC now?

CAT Co. is reviewing a suggestion to take out a loan for $1,500,000 at stated rate of 8% to pay off the bond and reduce equity by $500,000. Equity cost increase 17%.

d. What is their cost of debt AND how much debt will they have?

e. What is their cost of equity AND how much equity will they have?

f. What would be their new WACC?

g. How many shares of stock would they repurchase (at the original price) as part of the capital change (original price)?

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