You have been asked to estimate the cost of capital for ABC Corporation. The company has 10 million shares and 200,000 b

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You have been asked to estimate the cost of capital for ABC
Corporation. The company has 10 million shares and 200,000 bonds
outstanding at par value $15,000. In addition, it has
$500 million in short-term debt from bank. The target capital
structure ratio is 70 percent equity, 20 percent long-term debt,
and 10 percent short-term debt.
The current capital structure has temporarily moved slightly away
from the target ratio. The company’s shares currently trade at $50
with a beta of 1.30. The book value of the shares is
$45. The annual coupon rate of the bonds is 10 percent, they trade
at 105 percent of par, and they will mature in seven years.
Interest on the short-term debt is 10 percent. The current yield on
ten-year government bonds is 7 percent. The market risk is 15
percent. The corporate tax rate applicable is expected to be 25
percent.