You have been asked to estimate the cost of capital for ABC Corporation. The company has 10 million shares and 200,000 b
Posted: Sun May 29, 2022 6:36 pm
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.
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.