You need to calculate the ABC Corporation's cost of debt, cost of equity, and WACC. Here's what's known: ABOUT THE MARKET: The expected return on the market portfolio is 12 percent. Treasury bills offer a 3.4 percent annual return. ABOUT THE "ABC CORPORATION": It's a levered firm. (If it did not have debt, the Beta of its equity would have been 1.15.) Its target debt-to-equity ratio is 65 and it would like to maintain this ratio in the future. This firm has debt that matures in 25 years, has a $1,000 par value (per bond), and the coupon rate of 6.3 percent. Semiannual coupon payments are required until the debt matures. Today's price of each bond is $1,065. The firm pays taxes according to an income tax rate of 21 percent. a. ABC's cost of debt (HINT: "annual yield to maturity"!) equals: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. ABC's cost of equity equals: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. ABC's WACC (TIP: if you're unsure how to go from "debt-to-equity ratio" to "weight of debt" and "weight of equity", watch my short video https://youtu.be/BAipMtb6N9k) equals: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
You need to calculate the ABC Corporation's cost of debt, cost of equity, and WACC. Here's what's known: ABOUT THE MARKET: The expected return on the market portfolio is 12 percent. Treasury bills offer a 3.4 percent annual return. ABOUT THE "ABC CORPORATION": It's a levered firm. (If it did not have debt, the Beta of its equity would have been 1.15.) Its target debt-to-equity ratio is 65 and it would like to maintain this ratio in the future. This firm has debt that matures in 25 years, has a $1,000 par value (per bond), and the coupon rate of 6.3 percent. Semiannual coupon payments are required until the debt matures. Today's price of each bond is $1,065. The firm pays taxes according to an income tax rate of 21 percent. a. ABC's cost of debt (HINT: "annual yield to maturity"!) equals: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. ABC's cost of equity equals: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. ABC's WACC (TIP: if you're unsure how to go from "debt-to-equity ratio" to "weight of debt" and "weight of equity", watch my short video https://youtu.be/BAipMtb6N9k) equals: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You need to calculate the ABC Corporation's cost of debt, cost of equity, and WACC.
Here's what's known:
ABOUT THE MARKET: The expected return on the market portfolio is 12 percent.
Treasury bills offer a 3.4 percent annual return.
ABOUT THE "ABC CORPORATION": It's a levered firm. (If it did not have debt, the Beta of
its equity would have been 1.15.) Its target debt-to-equity ratio is 65 and it would like to
maintain this ratio in the future. This firm has debt that matures in 25 years, has a $1,000
par value (per bond), and the coupon rate of 6.3 percent. Semiannual coupon payments
are required until the debt matures. Today's price of each bond is $1,065. The firm pays
taxes according to an income tax rate of 21 percent.
a. ABC's cost of debt (HINT: "annual yield to maturity"!) equals: (Do not round
intermediate calculations and enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)
b. ABC's cost of equity equals: (Do not round intermediate calculations and enter your
answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c. ABC's WACC (TIP: if you're unsure how to go from "debt-to-equity ratio" to "weight of
debt" and "weight of equity", watch my short video https://youtu.be/BAipMtb6N9k)
equals: (Do not round intermediate calculations and enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
Cost of debt
Cost of equity
a.
b.
C. WACC
%
%
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