The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%. 1) What is the best estimate of the after-tax cost of debt (%)?
2) Based on the CAPM, what is the firm's cost of equity (%)?
3) Calculate the weights of market value of debt and market value of equity for use in calculating the WACC based in market values.
4) Calculate ABC's WACC (%).
Assets
Current assets 38,000,000
Net plant, property, and equipment 101,000,000
Total assets 139,000,000
Liabilities and Equity
Accounts payable 10,000,000
Accruals 9,000,000
Current liabilities 19,000,000
Long-term debt (40,000 bonds,
$1,000 par value) 40,000,000
Total liabilities 59,000,000
Common stock (10,000,000 shares) 30,000,000
Retained earnings 50,000,000
Total shareholders' equity 80,000,000
Total liabilities and shareholders' equity 139,000,000