refund question

Expert Solution

Answer of Part a:

Face Value = $2,000
Current Price = $2,110

Annual Coupon Rate = 6.2%
Annual Coupon = $2,000 * 6.2% = $124

Time to Maturity = 28 years

Let annual YTM be i%

$2,110 = $124 * PVIFA(i%, 28) + $2,000 * PVIF(i%, 28)

Using financial calculator:
N = 28
PV = -2,110
PMT = 124
FV = 2000

I = 5.80%

Annual YTM = 5.80%

Before-tax Cost of Debt = 5.80%
After-tax Cost of Debt = 5.80% * (1 - 0.21)
After-tax Cost of Debt = 4.58%

Answer of Part b:

Cost of Common Equity = Risk-free Rate + Beta * (Market Expected Return – Risk Free Rate)
Cost of Common Equity = 3.5% + 1.05 * (10% - 3.5%)
Cost of Common Equity = 3.5% + 6.83%
Cost of Common Equity = 10.33%

Answer of Part c:

Weight of Debt = 0.70/1.70
Weight of Debt = 0.4118

Weight of Common Stock = 1/1.70
Weight of Common Stock = 0.5882

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Common Stock*Cost of Common Stock
WACC = 0.4118 * 4.58% + 0.5882 * 10.33%
WACC = 7.96%

jeff jeffy answered 1 year ago

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