question archive The current market rate of return is 15% and the risk-free rate is 1%
The current market rate of return is 15% and the risk-free rate is 1%
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The current market rate of return is 15% and the risk-free rate is 1%. You have been given the job of determining your firm's cost of capital components. The company has 1300000 shares outstanding with a current value of $21.90 per share. The debt represents 35% of the capital structure and the yield to maturity is 7%. The beta of the equity is 1.2 and the tax rate is 33%. What is the market value of debt and its net cost to the firm? The market value of debt is $9,964,500.00 and the net cost of debt is 4.69%. The market value of debt is $18,505,500.00 and the net cost of debt is 2.31%. The market value of debt is $15,330,000.00 and the net cost of debt is 4.69%. The market value of debt is $81,342,857.14 and the net cost of debt is 7.00%.
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1. Market value of equity=number of shares*price=1,300,000*21.9=28,470,000
Debt represents 35%, hence equity represents 65% (1-35%)
Total value=Market value of equity/65%=28,470,000/65%=43,800,000
Market value of debt=Total value*35%=43,800,000*35%=15,330,000
2. Net cost of debt=Yield to Maturity*(1-tax rate)=7%*(1-33%)=4.69%
Option III is correct
