The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%. 1) What is the best estimate of the after-tax cost of debt (%)?
2) Based on the CAPM, what is the firm's cost of equity (%) ?
3) Calculate the weights of market value of debt and market value of equity for use in calculating the WACC based in market values?
4) Calculate ABC's WACC (%) based on your answers to 1), 2), and 3)
Show all of your calculations with appropriate explanation. You won't earn any point without showing allof your calculation work.
Assets
Current assets 38,000,000
Net plant, property, and equipment 101,000,000
Total assets 139,000,000
Liabilities and Equity
Accounts payable 10,000,000
Accruals 9,000,000
Current liabilities 19,000,000
Long-term debt (40,000 bonds, $1,000 par value) 40,000,000
Total liabilities 59,000,000
Common stock (10,000,000 shares) 30,000,000
Retained earnings 50,000,000
Total shareholders' equity 80,000,000
Total liabilities and shareholders' equity 139,000,000