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 6:38 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.
What would be the appropriate cost of capital for the ABC
Corporation? Explain.
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.