Price of Zero Coupon Bond =1000*65% =650
Number of years =5
YTM =(1000/650)^(1/5) -1 =8.9977%
Value of Zero coupon bond =Number of bonds*Price =5000*650
=3,250,000
YTM of coupon bond =11%
Value of bond =Number of bonds *Price =5000*940 =4,700,000
Average Cost of Debt
=3250000/(3250000+4700000)*8.9977%+4700000/(3250000+4700000)*11%
=10.18145%
Total Value of Debt =3250000+4700000 =7,950,000
Cost of Equity = Risk free Rate+Beta*(Market Return-Risk free Rate)
=5%+2.5*(10%-5%) =17.50%
Market Value of Equity =1,000,000*10 =10,000,000
WACC =Weight of Equity*Cost of Equity+Weight of Debt*Cost of
Debt*(1-Tax Rate)
=10,000,000/(10,000,000+7950000)*17.50%*7950000/(10,000,000+7950000)*10.18145%*(1-30%)
=12.91%
Question 2 Orange Corp has 1 million shares outstanding, and the stock is currently trading at...
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