A new company called 99 cent sushi has 1000 shares outstanding that sell for $1.

Question

A new company called 99 cent sushi has 1000 shares outstanding that sell for $1.8 each and have a beta of 1.2. The stock market is doing rather well and the market return is 15% while the risk free rate is 3.5%. 99 cent sushi has one outstanding bond issued with a Face Value of 2000 and a coupon rate of 10%. The bond has 10 years to maturity and is currently being traded for 108% of its face value. The company is required to pay at 35% tax rate.

Calculate the following:

A) The cost of Equity:

B)The cost of Debt:

C)The capital structure weights (the percentage of the companys combined value that is from equity and debt)

Explanation / Answer

cost of equity using the capm model

=risk free+(beta*(market return-risk free))

=3.5%+(1.2*(15%-3.5%))

=17.3%

cost of debt can be found using rate formual in excel

=rate(nper,pmt,pv,fv,type)

=rate(10,(2000*10%),-(108%*2000),2000,0)

=8.77%

after tac cost of debt=8.77%*(1-35%)=5.70%

c) Debt=108%*2000=2160

equity=10000*1.8=1800

Wt of debt=2160/(2160+1800)

=54.55%

equity=1800/(2160+1800)

=45.45%

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