Johnson Inc has 2,000 bonds and 300,000 shares of common stock outstanding. The common stock has a beta of 1.3 and trades at $18 per share. The bonds are $1,000 face value with a 5% coupon rate, paid semi annually, and currently trade at $985. 8 years to maturity. The firm is in 40% tax bracket. You have estimated the market risk premium to be 6% and yield on 10 year U.S. treasuries is 4%. The CAPM holds.
A. What is the yield to maturity on the firm’s bonds?
B. Using CAPM what is the required rate of return on firm’s equity?
C. What is the firm WACC?