A firm currently has the following capital structure which it intends to maintai

Question

A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before-tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firm's marginal tax rate is 40%. The company has no plans to issue new securities.
1- The current total value of the firm is:
A) $6,450,000.
B) $5,750,000.
C) $4,950,000.
D) $3,250,000.

2- The proportion of debt in this firm's capital structure is:
A) 40%.
B) 50%.
C) 60%.
D) 70%.
3-The after-tax cost of debt is:
A) 6.20%.
B) 5.40%.
C) 4.60%.
D) 3.80%.
4-The firm's weighted average cost of capital is:
A) 10.47%.
B) 9.29%.
C) 8.63%.
D) 7.71%
please show the work

Explanation / Answer

1. Value of debt = 115/100*$3,000,000= $3,450,000 Value of equity =46,000 *$50= $2,300,000 Total value of the firm = $2,300,000 +$3,450,000 =$5,750,000 Answer B) $5,750,000. 2. proportion of debt =$3,450,000/$5,750,000 =60.0% Answer C) 60%. 3. After tax cost of debt = 60%*7.67% =4.60% Answer C) 4.60%. 4.re = 50 = $5.50/(re- 3.67% ) re=14.67% WACC =14.67%*40% +60%*4.60%=8.63% Answer C) 8.63%.

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