Phillips Equipment Inc. has 72,000 bonds outstanding that are each selling at$1,066 in the market. Each bond has 8 years left to maturity, a $1000 facevalue and a coupon rate of 5%. Coupons are paid semiannually. The companyalso has 1.9 million shares of common stock outstanding. The common stockhas a beta of 1.35 and sells for $44 a share. The U.S. Treasury bill is yielding3.1 percent and the return on the market is 9.5 percent. The corporate tax rateis 35 percent.(a) Determine the firms market value weight for debt (Enter answers as a % to 2decimal places)8.41 %(b) Determine the firms market value weight for equity (Enter answers as a % to2 decimal places) 91.59 %(c) What is the firms after tax cost of debt? (Enter answers as a % to 2 decimalplaces) 2.81%(d) What is the firms cost of equity? (Enter answers as a % to 2 decimal places)11.74 %(e) Using the information you have found in the earlier parts, determine theCost of Capital for Phillips Equipment Inc. (Enter answers as a % to 2 decimalplaces)%

The cost of capital refers to the return that the company provides to all its stakeholders for their…

Answered: Phillips Equipment Inc. has 72,000…

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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G4X Inc. is a publicly traded company with 25 million shares outstanding. The stock last traded at $10 a share and has a levered beta of 1.4. G4X Inc. has a $25 million bond outstanding on which it makes $1 million interest only payments each year with 5 years left to maturity. In addition, G4X Inc. has operating leases with required lease payments of $2 million a year for the next five years. Moody's rates the bond Baa which has a current default spread of 1.5%. The current marginal tax rate is 37%. The current risk-free rate is 2.0%, and the current equity risk premium is 6.0%. What is the current cost of capital for G4X Inc.?
Suppose Westerfield Co. has the following financial information: Debt: 900, 000 bonds outstanding with a face value of $1,000. The bonds currently trade at 85% of par and have 12 years to maturity. The coupon rate equals 7%, and the bonds make semiannual interest payments. Preferred stock: 600,000 shares of preferred stock outstanding; currently trading for $108 per share, paying a dividend of $9 annually. Common stock: 25,000,000 shares of common stock outstanding; currently trading for $185 per share. Beta equals 1.22. Market and firm information: The expected return on the market is 9%, the risk - free rate is 5%, and the tax rate is 21 %. Calculate the weight of debt in the capital structure. (Enter percentages as decimals and round to 4 decimals)
Charter Corp. has issued 1,554 debentures with a total principal value of $1,554,000. The bonds have a coupon interest rate of 9%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 39% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue?
A company has bonds which currently see for 82% of par. They pay a 6% coupon semi - annually, and have 12 years left to maturity. What is the cost of debt?
Big Door Company has 8.7 million shares outstanding, which are currently trading for about $13 per share and have a levered equity beta of 1.2. Big Door has 19,900 outstanding bonds, with a 4% coupon rate, payable semi-annually and due in 10 years. The bonds are rated BBB. Currently the credit spread for BBB is 178 basis points over equivalent-maturity Government of Canada debt. The current yield on 10-year Canada bonds is 5%, compounded semi-annually. The risk-free interest rate is 2%, and the market risk premium is 6.6%. The company has a 35% tax rate. (Do not round intermediate calculations.) a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.) WACC b. Calculate Big Door's unlevered beta, using the following formula: (Round your answer to 2 decimal places.) Pleveret Pdebtx (1–Tc)×D/E BU 1+(1–Tc)×D/E es Unlevered beta c. If Big Door was 50% debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure change. (Round…
The numbers provided are in thousands of dollars. All securities are selling at par. Treasury bill $ 90 Time deposits $1,100 Treasury notes $ 55 Fed funds sold $ 230 Treasury bonds $ 176 Demand deposits $2,500 Loans $4,679 Equity $1,170 Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is .003 years. Question: If relative change in all market interest rates is a decrease of 1%, calculate the impact on…
BankMart Inc. recently issued bonds that mature in 11 years. They have a par value of $1,000 and an annual coupon of 6%. The current market interest rate is 8%. What is the bond's value?
Pearce's Cricket Farm issued a 10-year, 8% semiannual bond 3 years ago. The bond currently sells for 96% of its face value. The company's tax rate is 35%. Suppose the book value of the debt issue is $50 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years left to maturity; the book value of this issue is $30 million and the bonds sell for 55% of par. Assume the par value of the bond is $1,000. What is the company's total book value of debt? (Enter the answer in dollars. Omit $ sign in your response.) Total book value $ 8000000 What is the company's total market value of debt? (Enter the answer in dollars. Omit $ sign in your response.) Total market value $ 6450000 What is your best estimate of the after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of debt

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