Question

Makai Metals Corporation has 9.1million shares of common stock outstanding and 230,000   6.2 percent semiannual bonds outstanding, par value $1000 each.  The common stock currently sells for $41 per share and has a beta of 1.20, and the bonds have 20 years to maturity and sell for 104 percent of par.  The market risk premium is 7 percent, T-bills are yielding 3.1 percent, and the tax rate is 35 percent.  

a. What is the firm's market value capital structure?

b.  If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?  

Answer 1

Before tax cost of debt: 5.86% RATE(20 2,1000*6.2%/2,-1040, 1000) *2 after tax cost of debt: 3.81% before tax cost x 1-tax rate (5.86%*(1-0.35)) Cost of equity: = risk free rate +beta x market premium 11.50% 0.031+(1.2 0.07) After tax WACC: Market value weight Particulars weighted cost cost amount $373,100,000 11.50% Equity 0.6093 0.07007431 $239,200,000 Debt 3.81% 0.3907 0.01487475 8.49% WACC $612,300,000