Question 1 Irvine Hall Condominiums (IHC) is a major producer of mattresses and plastic goods. You are the Vice-Presiden

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Question 1 Irvine Hall Condominiums Ihc Is A Major Producer Of Mattresses And Plastic Goods You Are The Vice Presiden 1 (63.99 KiB) Viewed 22 times

Question 1 Irvine Hall Condominiums (IHC) is a major producer of mattresses and plastic goods. You are the Vice-President of Finance. This is a position with high visibility and an opportunity for rapid advancement, providing you make the right decisions. Your boss asked you to estimate the weighted average cost of capital for the company. The following is the balance sheet and some information about IHC. Assets Current assets $38,000,000 $101,000,000 Net plant, property, and equipment 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) Total liabilities $40,000,000 $59,000,000 Common Stock (10,000,000 shares) $30,000,000 Retained Earnings $50,000,000 $80,000,000 Total shareholders' equity Total liabilities and shareholders' equity $139,000,000 You check The Wall Street Journal and see that IHC stock is currently selling for $7.50 per share and that IHC bonds are selling for $889.50 per bond. These bonds have a 7.25 percent annual coupon rate, with semi-annual payments. The bonds mature in twenty years. The beta for your company is approximately equal to 1.1. The yield on a 6-month Treasury bill is 3.5 percent and the yield on a 20-year Treasury bond is 5.5 percent. The expected return on the stock market is 11.5 percent, but the stock market has had an average annual return of 14.5 percent during the past five years. IHC is in the 40 percent tax bracket. (i) Using the CAPM approach, what is the best estimate of the cost of equity for IHC? (ii) What is the best estimate for the after-tax cost of debt for IHC? (2 marks) (4 marks) (iii) What is the best estimate for the weights to be used when calculating Weighted Cost of Capital (WACC)? (3 marks) (iv) What is the best estimate of the WACC for IHC? (4 marks) (v) What is the current yield on the bond? (3 marks)