Thorpe and Company is currently an all-equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85, and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds sell, the company's beta will increase to 0.95. What was Thorpe and Company's WACC before the bond sale? Hint: The weight of equity before selling the bond is 100%.

Thorpe and Company is currently an all-equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85, and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds sell, the company's beta will increase to 0.95. What was Thorpe and Company's WACC before the bond sale? Hint: The weight of equity before selling the bond is 100%.

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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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

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Thorpe and Company is currently an all-equity firm. It has 3 million shares selling for $28 per
share. Its beta is 0.85, and the current risk-free rate is 2.5%. The expected return on the market for
the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock
with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and
$1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds sell, the
company's beta will increase to 0.95. What was Thorpe and Company's WACC before the bond
sale? Hint: The weight of equity before selling the bond is 100%.

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