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Company Y market value of debt is $6 million. Company Y has 300 000 shares outstanding...

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Finance

Company Y market value of debt is $6 million. Company Y has 300000 shares outstanding and current share price is $22. The cost ofequity is 15%. Company tax rate 35%.

a)What is the market value of equity?

b) What is the debt to equity ratio?

c)If company’s weighted average cost of capital (WACC) is 10%,what is the pretax cost of debt?

d) Company Y has an investment project, which cost $2 millionand offers cash flow $1,5 million per year for next six years.Assume that the project has the same risk as the company’s corebusiness. Calculate the NPV. Would you accept this project?

Answer & Explanation Solved by verified expert
3.9 Ratings (395 Votes)
a MV of equity priceshares 300000226600000 b DE 6660909 c Weight of debt DED 666604761 Weight of equity1Weight of debt 10476105239 Weight of Stock 05239 Weight    See Answer
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Company Y market value of debt is $6 million. Company Y has 300000 shares outstanding and current share price is $22. The cost ofequity is 15%. Company tax rate 35%.a)What is the market value of equity?b) What is the debt to equity ratio?c)If company’s weighted average cost of capital (WACC) is 10%,what is the pretax cost of debt?d) Company Y has an investment project, which cost $2 millionand offers cash flow $1,5 million per year for next six years.Assume that the project has the same risk as the company’s corebusiness. Calculate the NPV. Would you accept this project?

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