0 points)You are an outside analyst attempting to estimate the cost of capital f

Question

0 points)You are an outside analyst attempting to estimate the cost of capital for the LTI Corporation. Yo sheet shows a total of $40 million of long term debt with an annual coupon rate of 8% paid semi- annually and the total current market value is $35 million. The bond currently sells for $976 and the face value is $1000. It has 20 years to maturity. The balance sheet also shows the total of common stock and retained earnings is $30 million. The company's stock price is $7.50 per share. There are 10 million shares of stock outstanding, and the current risk free rate is 3%. The company typically pays out about 20% of their earnings in cash dividends. LTI's return on equity is 12% and the expected return on the market is 9.80%. The company has a beta of 1.8. What is your estimate of LTI's weighted average cost of capital if their marginal tax rate is 34%? 4). (1 u do not know the corporation's target capital structure. However, the balance

Explanation / Answer

Long Term Debt: Current Market Value $35,000,000 Semiannual Coupon per bond $40 (1000*(0.08/2)) 39040000 Market price per Bond $976 Number of Semi annual period to maturity                             40 (20*2) Semiannual Yield to maturity 4.123% (using RATE function of excel with Nper=40,Pmt=40, PV=-976, FV=1000 Annual yield to maturity 8.25% (4.123*2) Pretax Cost of Long term debt 8.25% After tax cost of debt=8.25*(1-0.34) 5.44% Common Stock and Retained earnings Return on equity 12% Total equity plus retained earning $30,000,000 Total earning(0.12*30000000) $3,600,000 Number of Share 10000000 Market value of shares 75000000 10000000*7.5) Required Rate of Return=Rf+Beta*(Rm-Rf) Rf=Risk free Rate=3% Rm=Market Return=9.8% Beta=1.8 Required rate of Return=3+1.8*(9.8-3)=) 15.24 Market Value of Debt $35,000,000 Market Value of equity $        75,000,000 Total Market Value of capital $110,000,000 Weight of Debt 0.318181818 (35/110) Weight of Equity 0.681818182 (75/110) Weighted Average cost of Capital                       12.12 (0.32*5.44+0.68*15.24) Weighted Average cost of Capital 12.12%

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