4) A company has a target capital structure of 50% debt and 50% equity. The...
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4) A company has a target capital structure of 50% debt and 50% equity. The company's bonds with face value of $1,000 pay an 8% coupon (annual), mature in 10 years and have a yield to maturity of 11%. The company stock beta is 1.4, the risk-free rate is 8%, and the market risk premium is 5%. The company is a constant-growth firm that just paid a dividend of $1.5, sells for $20 per share, and has a growth rate of 7%. The company's marginal tax rate is 30%. a) What is the company's after-tax cost of debt? b) What is the company's cost of equity using CAPM? c) What is the company's cost of equity using the dividend discount model? d) What is the company's WACC using CAPM? e) (bonus) - what are the company's bonds trading at (i.e. the fair value)
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