A firm issues both stocks and corporate bonds. You are given: i. Current stock price is $25 per share, and there are 45000 outstanding shares in the market. ii. The stock's beta is 1.39. iii. The firm has 500 outstanding bonds rated A. iv. Bond price is $1000 and yield-to-maturity is 2%. v. Bonds are subject to a default rate of 2.5%, and the expected loss rate given default is 75%. vi. The risk-free rate is 1%. vii. The market risk premium is 6.5%. viii. Current corporate tax rate is 33.5%. The firm does not hold cash. Calculate the weighted average cost of capital.
A firm issues both stocks and corporate bonds. You are given: i. Current stock price is $25 per share, and there are 45000 outstanding shares in the market. ii. The stock's beta is 1.39. iii. The firm has 500 outstanding bonds rated A. iv. Bond price is $1000 and yield-to-maturity is 2%. v. Bonds are subject to a default rate of 2.5%, and the expected loss rate given default is 75%. vi. The risk-free rate is 1%. vii. The market risk premium is 6.5%. viii. Current corporate tax rate is 33.5%. The firm does not hold cash. Calculate the weighted average cost of capital.
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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A firm issues both stocks and corporate bonds. You are given:
i. Current stock price is $25 per share, and there are 45000 outstanding shares in the market.
ii. The stock's beta is 1.39.
iii. The firm has 500 outstanding bonds rated A.
iv. Bond price is $1000 and yield-to-maturity is 2%.
v. Bonds are subject to a default rate of 2.5%, and the expected loss rate given default is 75%.
vi. The risk-free rate is 1%.
vii. The market risk premium is 6.5%.
viii. Current corporate tax rate is 33.5%.
The firm does not hold cash. Calculate the weighted average cost of capital.
Possible Answers](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1bcb22fa-f91f-4e0d-8193-1cb3b9ae0f86%2F00bbc2c5-0994-4c79-a9c9-2e6ae70f54c9%2Fyjuf4hc_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Question
A firm issues both stocks and corporate bonds. You are given:
i. Current stock price is $25 per share, and there are 45000 outstanding shares in the market.
ii. The stock's beta is 1.39.
iii. The firm has 500 outstanding bonds rated A.
iv. Bond price is $1000 and yield-to-maturity is 2%.
v. Bonds are subject to a default rate of 2.5%, and the expected loss rate given default is 75%.
vi. The risk-free rate is 1%.
vii. The market risk premium is 6.5%.
viii. Current corporate tax rate is 33.5%.
The firm does not hold cash. Calculate the weighted average cost of capital.
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