Answer Happy

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. What would be the appropriate cost of capital for the ABC Corporation? Explain!