a) The cost of capital before tax. Given: A firm has 40000 shares whose current price is $80.75.

rocedwrp 2021-08-20 Answered

a) The cost of capital before tax.
Given: A firm has 40000 shares whose current price is $80.75.
Those stockholders expect a return of 15%.
The firm has a 2 year loan of $900000 at 6.4%.
It has issued 12,500 bonds with a face value of 1000.
Time period for maturity is 15 years.
The semiannual interest rate is 6%.
The current price is $1090.
b) The cost of capital after tax.

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Expert Answer

Nola Robson
Answered 2021-08-21 Author has 94 answers

a) Calculation:
Equity=(Shares)×(Price of shares) ...... (I)
Substitute 40000 for shares, and $80.75 for Price of shares in Equation (I).
Equi<y=$40000×80.75
=$3230000
Calculate the total bond fund.
Bond fund=(Number of bond)×(Bond value) ......(II)
Substitute 12,500 for number of bonds, and $1090 for bond value in Equation (II).
Bond fund =$12500×$1090
=$13625000
Calculate the total fund.
Total fund =$3230000+$9000000+$13625000
=$17755000
Calculate the cost of capital before tax.
ParticularsFund(A)Weight(B)(A$17755000)Rate(C)Weighted Rate(B×C)Equity$32300000.1815%2.73Bonds$136250000.776%0.32Loan$9000000.056.4%4.60Total$177550007.66%
Conclusion:
Therefore, the cost of capital before tax is, 6.50%.
b) Calculate the rate for the loan.
Rate =6.4%(10.40)
=3.84%
Calculate the interest rate on the bonds.
Rate =6%(10.40)
=3.6% Calculate the interest rate on Equity.
Rate =15%(10.40)
=9%
Calculate the cost of capital after tax.
ParticularsFund(A)Weight(B)(A$17755000)Rate(C)Weighted Rate(B×C)Equity$32300000.189%1.62Bonds$136250000.773.6%2.772Loan$9000000.053.84%0.192Total$177550004.584%
Conclusion:
Therefore, the cost of capital after tax is, 4.584%.

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