Company A is a motion picture production company. At the end of its most recent financial year, the firm had $500 million in Interest bearing debt on its books (with interest payments of $35 million a year and an average maturity of 8 years). The firm has a rating of B+ and a pre-tax cost of debt of 8%. There are 50 million shares trading at $6 per share and the levered beta for the firm is 2.25. The tax rate is 40%, the risk-free rate is 4% and the market risk premium is 4.82%, Estimate the current cost of capital for the firm. And assume now that Marvel Inc. is able to issue enough stock to retire half of its outstanding debt (in market value terms). If the stock price does not change after this transaction, estimate the pre-tax cost of debt after the transaction.
Company A is a motion picture production company. At the end of its most recent financial year, the firm had $500 million in Interest bearing debt on its books (with interest payments of $35 million a year and an average maturity of 8 years). The firm has a rating of B+ and a pre-tax cost of debt of 8%. There are 50 million shares trading at $6 per share and the levered beta for the firm is 2.25. The tax rate is 40%, the risk-free rate is 4% and the market risk premium is 4.82%, Estimate the current cost of capital for the firm. And assume now that Marvel Inc. is able to issue enough stock to retire half of its outstanding debt (in market value terms). If the stock price does not change after this transaction, estimate the pre-tax cost of debt after the transaction.
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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Transcribed Image Text:Company A is a motion picture production
company. At the end of its most recent financial
year, the firm had $500 million in Interest bearing
debt on its books (with interest payments of $35
million a year and an average maturity of 8 years).
The firm has a rating of B+ and a pre-tax cost of
debt of 8%.
There are 50 million shares trading at $6 per share
and the levered beta for the firm is 2.25. The tax
rate is 40%, the risk-free rate is 4% and the market
risk premium is 4.82%,
Estimate the current cost of capital for the firm.
And assume now that Marvel Inc. is able to issue
enough stock to retire half of its outstanding debt
(in market value terms). If the stock price does not
change after this transaction, estimate the pre-tax
cost of debt after the transaction.
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