1. A company’s invested capital structure is listed on their balance sheet as follows:
Debt (8% coupon, maturing in 10 years) $20,000,000
Common Equity (3,000,000 shares outstanding, $0.01 par) $30,000,000
The following market information is also available:
Bond Price 105
Common Stock Price $11
Beta 1.6
Return on 90-day T-Bills 4%
Return on S&P 500 index 10%
The company pays a 40% tax rate on its earnings.
a) Calculate this company’s cost of debt.
b) Calculate this company’s cost of equity.
c) Calculate the market value of this company's debt.
d) Calculate the market value of this company's equity.
e) Calculate the value of this company's WACC.