Consider the following balance sheet:
Assets
Current assets $38,000,000
Net plant, property, and equipment $101,000,000
Total Assets $139,000,000
Liabilities and Equity
Accounts payable $10,000,000
Accruals $9,000,000
Current liabilities $19,000,000
Long term debt (40,000 bonds, $1,000 face value) $40,000,000
Total liabilities $59,000,000
Common Stock (10,000,000 shares) $30,000,000
Retained Earnings $50,000,000
Total shareholders equity $80,000,000
Total liabilities and shareholders equity $139,000,000
This company's stock is currently selling for $7.50 per share and the bonds are selling for $889.50 per bond. These bonds' yield to maturity is 7.6%. The beta for this company is approximately equal to 1.1. The yield on a 6-month Treasury bill is 3.5% and the yield on a 20-year Treasury bond is 5.5%. The expected return on the stock market is 11.5%, but the stock market has had an average annual return of 14.5% during the past five years. This company is in the 40% tax bracket.
What is the cost of equity?
What is the after-tax cost of debt?
What are the weights on debt and equity?
What is the Weighted Average Cost of Capital?