you have been asked by a corporation to evaluate its capital structure?
It currently has 70 million shares outstanding, trading at $10 per share. In addition, it has 500000 convertible bonds, wit a coupon rate of 8%, trading at $1000 per bond. Corp is rated BBB, and the interest rate on BBB straight bonds is currently 10%. The beta for the company is 1.2, and the current risk-free rate is 6%. the tax rate is 40%.
What is the firm’s current debt/equity ratio?
What is the firm’s current weighted average cost of capital?
Corporation is proposing to borrow $250 million and use it for the following purposes: Buy back $100 million worth of stock. Pay $100 million in dividends. Invest $50 million in a project with a NPV of $25 million.
The effect of this additional borrowing will be a drop in the bond rating to B, which currently carries and interest rate of 11%.
what will be te firm’s cost of equity after this additional borrowing? What will be the firm’s weighted average cost of capital after this additional borrowing?
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about 1 year ago
You’re asking us to do an aweful lot of work for you here.
Why don’t you break this up into individual questions for us?
(For the WACC question, I’m going to do you a favor and tell you to work this out yourself with the proper equation. This is not something you just see and learn and move on, you have to excercise the formula to learn and remember it and see how it works. You have to be able to visualize the fact that interest is deductible so you can make fast, sharp decisions. We’re not helping you by just giving you the answer.)