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Comstock Inc. has 10,000,000 outstanding shares of common stock with a market price of $30 per...

Comstock Inc. has 10,000,000 outstanding shares of common stock with a market price of $30 per share. The Risk Free Rate is 5%, and the market portfolio offers an expected return of 14%. The equity beta of Comstock common stock is 1.45. Comstock also has a number of outstanding bonds that gives altogether $100,000,000 in face value. These bonds have 10 % annual coupon, ten years left to maturity and a market YTM of 7%. The firm has a tax rate of 35%.

What is the Market Value of all the Bonds?

Calculate the weighted-average cost of capital for Comstock Inc.

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Expert Solution

We can use financial calculator for calculation of market value of all the bonds with below key strokes:

N = maturity = 10; I/Y = YTM = 7%; PMT = annual coupon = $100,000,000*10% = $10,000,000‬; FV = face value = $100,000,000‬ > CPT = compute > PV = market value of all the bonds = $121,070,744.60

the Market Value of all the Bonds is $121,070,744.60.

weighted-average cost of capital = weight of debt*after-tax cost of debt + weight of equity*cost of equity

weight of debt = market value of debt/(market value of debt + market value of equity)

weight of equity = market value of equity/(market value of debt + market value of equity)

market value of debt is the Market Value of all the Bonds which is $121,070,744.60.

market value of equity = market price per share*no. of shares outstanding = $30*10,000,000 = $300,000,000

weight of debt = $121,070,744.60/($121,070,744.60 + $300,000,000) = $121,070,744.60/$421,070,744.6‬ = 0.29

weight of equity = $300,000,000/($121,070,744.60 + $300,000,000) = $300,000,000/$421,070,744.6‬ = 0.71

cost of debt is the YTM of bonds which is 7%.

after-tax cost of debt = YTM of bonds*(1-tax rate) = 7%*(1-0.35) = 7%*0.65 = 4.55‬%

Cost of equity = risk-free rate + beta of stock*(expected market portfolio return - risk-free rate)

Cost of equity = 5% + 1.45*(14% - 5%) = 5% + 1.45*9% = 5% + 13.05% = 18.05‬%

weighted-average cost of capital = 0.29*4.55% + 0.71*18.05% = 1.3195‬% + 12.8155% = 14.135‬ or 14.14%

jeff jeffy answered 1 year ago
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