1(a). Company ABC has the following audited balance sheet amounts (under appropriate accounting rules): Bank Loan...

1(a). Company ABC has the following audited balance sheet amounts (under appropriate accounting rules):

Bank Loan (Floating rate = prime rate) = $100,000,000

Bonds (7% coupon, 10 years to maturity) = $2,000,000,000

Class A Common Stock (100,000,000 shares outstanding) = $1,000,000,000

Class B Common Stock (200,000,000 shares outstanding) = $2,000,000,000

If the YTM (yield to maturity) on the bonds is 6%, the stock price for Class A=$50 per share and for Class B = $50 per share, the beta of the company is 1.3, the risk-free rate is 2% and E(Rm) =9%, calculate the WACC.

(b) Using the numbers in (a), if the company issues $2,000,000,000 (market value) in 6% 20 year bonds to fund a new project, what is the new WACC?

(c) After issuing the debt in part (b), if the company’s new project is a failure and the company is now close to bankruptcy, what is the WACC if the stock price falls to $10 and the YTM is 10%? (Note: you have to calculate the new equity beta with the revised capital structure)

Expert Solution

jeff jeffy answered 9 months ago

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