You are given the following information on Norne Corporation: Debt 9000 corporat

Question

You are given the following information on Norne Corporation: Debt 9000 corporate bonds with $1000 par value and a current price of $1040 the bonds have a 6.2% coupon, pay interest semiannually. and mature in 20 years. Equity 225000 shares of common stock selling at $64.5 per share, the stock has a beta of 0.85 Market The expected return on the market is 12% , and the risk free rate is 5% If the tax rate for norne is 35%

A) Calculate the after-tax cost of debt for Norne

B) Calculate the cost of equity for Norne

C) Calculate the weighted average cost of capital for Norne.

Explanation / Answer

Bond Interest rate=6.2%

A).Cost of debt after tax=Bond Interest rate(1-Tax rate)=6.2%(1-0.35)=4.03%

B).Expected return on Equity=Risk free rate+beta(Market return-Risk free rate)=5%+0.85(12%-5%)=5%+5.95%=10.95%

Bond Value(Cost)=$1,000*9,000=$9,000,000

Equity( Market value)=225,000*$64.5=$14,512,500

the weighted average cost of capital for Norne:

Particulars Amount Weight Cost debt/Equity weighted average cost of capital    Bonds               900,000           0.06 4.03                 0.24 Equity         14,512,500           0.94 10.95               10.31         15,412,500           1.00               10.55

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