A company went public by issuing 500,000 shares of common stock at $10 per share. The shares are currently traded with a 40% premium. Current benchmark government bond rate is 8%, market return is 20% and the company has an unlevered beta coefficient of 0.26. At the beginning of the year, it issued 50,000 bonds of $1,000 par paying 10% coupon annually maturing in 20 years. The yield to maturity is always 10.61%. The bonds are currently trading with $80 discount. If the tax rate is 20%, what would be the approximate weighted average cost of capital (WACC) using the market values of debt and equity? A) 8.84% B) 9.28% C) 10.58% D) 11.00% E) Other (please specify
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
A company went public by issuing 500,000 shares of common stock at $10 per share. The shares are currently traded with a 40% premium. Current benchmark government bond rate is 8%, market return is 20% and the company has an unlevered beta coefficient of 0.26. At the beginning of the year, it issued 50,000 bonds of $1,000 par paying 10% coupon annually maturing in 20 years. The yield to maturity is always 10.61%. The bonds are currently trading with $80 discount. If the tax rate is 20%, what would be the approximate weighted average cost of capital (WACC) using the market values of debt and equity?
A) 8.84%
B) 9.28%
C) 10.58%
D) 11.00%
E) Other (please specify)
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