Question
In: Finance
2) Acme Mining Company has 7.7 million shares of common stock outstanding. In addition, the company...
2) Acme Mining Company has 7.7 million shares of common stock outstanding. In addition, the company has 200,000 bonds outstanding. The bonds have a 6.4% coupon (paid semi-annually) and their par value is $1,000. The common stock currently sells for $35 per share and has a beta of 1.20. The bonds have 10 years until maturity, and sell for 105% of par. The market risk premium is 7%, the risk-free rate is 2%, and the company’s tax rate is 40%.
a) What is the current market value of the company?
b) If the company is evaluating a new investment project that has the same risk as the company’s typical project, what rate should the firm use to discount the project’s cash flows?
c) Assume the company adjusts its capital structure and now has no debt (i.e. the company is all equity financed). What is the company’s stock beta?
Solutions
Expert Solution
| Bonds | Common Stock | ||
| Market value | 210000000 | 269500000 | |
| a | Total value | 479500000 | |
| Cost of debt pre tax | 5.74% | ||
| Cost of debt after tax | 3.44% | ||
|
Cost of equity= Rf+Beta*Rp |
10.400% | ||
| b | WACC | 7.35% | |
| c | Unlevered Beta= Equity Beta/(1+(1-t)*D/E) | 0.8177 |
Workings
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