Oompah-Loompah Vacations Company currently has 2.1 million shares of stock outstanding. It also has $20...
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Finance
Oompah-Loompah Vacations Company currently has 2.1 million shares of stock outstanding. It also has $20 million face value of bonds that have five years remaining to maturity, a 10% coupon, and are priced to yield 10.10%. Suppose the Oompah-Loompah Vacations Company has learned that it can issue new common stock at $20 a share. The last dividend of Oompah-Loompah Vacation's common stock was $1 per share and is expected to grow at a rate of 5% per year. The current risk-free rate of interest is 0.25% and the expected market return is 5.5%. Oompah-Loompah Vacations can also issue bonds. The common stock has a beta of 2.2. If Oompah-Loompah Vacations issues bonds, the bonds will be priced at par and have a yield of 10%. The firm's marginal tax rate is 25%. Assume that flotation costs for both the bonds and the stock are negligible.
Oompah-Loompah's after-tax cost of debt is closest to ...
9.0%
8.0%
8.5%
7.0%
7.5%
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