1. Capital Co. has a capital structure, based on current market values, that con
ID: 2754846 • Letter: 1
Question
1. Capital Co. has a capital structure, based on current market values, that consists of 43 percent debt, 8 percent preferred stock, and 49 percent common stock. If the returns required by investors are 11 percent, 13 percent, and 18 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
After tax WACC= %
2. You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 10.60 percent semi-annual coupon bonds are selling at a price of $1,034.33. These bonds are the only debt outstanding for the firm. What is the current YTM of the bonds? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
YTM= ?%
Explanation / Answer
Solution.
1. Calculation of After tax WACC= %
After Tax W.A.C.C = 0.12698 or 12.69%
2. Calculation of yield to maturity.
Effective annual yield = 10.50% semi annual is equal to 10.78% annual.
YTM = {C + (F+P/n)} / (F+P) /2
P = $1034.33
F = 1,000
n = 12 year
c = (1,000 x 10.78%) 107.80
{107.80 + (1,000 - 1034.33) / 12} / 1,000 + 1034.33 / 2
104.93 / 1017.165
10.31%
C = coupan / Intrest payment
F = Face value
n = Year of maturity
P = parice
Component Amount proportion individal cost Multiplication Debt 0.43 6.60% 0.02838 preferred stock 0.08 13.00% 0.0104 common stock 0.49 18.00% 0.0882 Total 1 0.12698 Cost of debt 11% x .60% = 6.6%Related Questions
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