1) Bombay Inc has 8.5 million shares of common stock outstanding, 250,000 shares of 5% preferred stock outstanding, and 135,000 7.5% semi-annual bonds outstanding, par value $1000 EACH. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114% of par. The market risk premium is 7.5%, T-bills are yielding 4%, and the company’s tax rate is 35%. a) Calculate the firm’s market value capital structure. b) Calculate the company WACC c) If Bombay Inc generates a 7.5% with this capital, is Bombay Inc destroying or adding value discuss.
1) Bombay Inc has 8.5 million shares of common stock outstanding, 250,000 shares of 5% preferred stock outstanding, and 135,000 7.5% semi-annual bonds outstanding, par value $1000 EACH. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114% of par. The market risk premium is 7.5%, T-bills are yielding 4%, and the company’s tax rate is 35%. a) Calculate the firm’s market value capital structure. b) Calculate the company WACC c) If Bombay Inc generates a 7.5% with this capital, is Bombay Inc destroying or adding value discuss.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1) Bombay Inc has 8.5 million shares of common stock outstanding, 250,000
shares of 5% preferred stock outstanding, and 135,000 7.5% semi-annual
bonds outstanding, par value $1000 EACH. The common stock currently sells
for $34 per share and has a beta of 1.25, the preferred stock currently sells for
$91 per share, and the bonds have 15 years to maturity and sell for 114% of
par. The market risk premium is 7.5%, T-bills are yielding 4%, and the
company’s tax rate is 35%.
a) Calculate the firm’s market value capital structure.
b) Calculate the company WACC
c) If Bombay Inc generates a 7.5% with this capital, is Bombay Inc
destroying or adding value discuss.
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