Question

DIY also had three bond issues outstanding. The first bond issue would mature in 8 years. It had $750,000 face value, 10% coupon rate and was trading at YTM of 9.5%. The second bond issue, with original maturity of 20 years, was issued 10 year ago. It had $800,000 face value and 8% coupon rate, and was trading at 103.5% of par. The third one was a perpetual bond that had $600,000 face value, 7% coupon rate and 7.5% YTM. All bonds paid semi-annual coupons. DIY had 35,000 shares of outstanding common stock, currently trading at $65 per share with beta of 1.35. The risk-free rate is 5% and the market risk premium is 9%. The tax rate is 40%.

1.What is the cost of equity?

2.What is the after-tax cost of debt?

3.What is the WACC under the current capital structure?

4.DIY wanted to finance a new $80,000 project and kept the current capital structure. The flotation costs on new debt and equity are 5% and 7% respectively. What will be the total cost of the project, including the flotation costs?

Answer 1