Use the following information for questions in problem 4:
The capital structure of Truman industries Inc. consists of bonds in common stock equity. TI’s tax rate is 40%. The details on the various components of its capital structure are as follows:
Bond:? Type: Fixed Semi - annual coupon, non callable
? Maturity: 20 years
? Coupon Rate: 7%
? Par Value: 1000
? Current Price: $850
Common Stock:
? Current Price: $18
? Last annual dividend just paid : $2
? Expected Growth Rate of dividends: 6%
? Beta: 1.4
? Risk free rate: 3.5%
? Expected Return of the market: 11.50%
Questions:
a) What is the after -tax cost of debt of bond 1
b) Using the CAPM what is the after tax cost of Equity of the common stock of TI ?
c) Truman Capital Structure consists of 60% in bonds with remainder in common stock eq