You have been asked to assess the cost of capital and return on capital for...
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You have been asked to assess the cost of capital and return on capital for MSFT Corporation. The following information is provided to you: The firm has 15 million shares outstanding, trading at $ 10 per share. The book value of equity is $ 50million. The firm has $ 50 million bond offering outstanding, with a coupon rate of 7%, trading at par. In addition, the firm has an old bank loan on its books, with 5 years left to maturity, an 8% stated interest rate, and a face value of $ 50 million. The firm's current beta is 1.20, the treasury bond rate is 6% and the market risk premium is 5.5% The firm also reported earnings before interest and taxes of $ 40 million (after operating lease expenses), and has a marginal tax rate of 40%. a. Estimate the market value of the outstanding debt (2pts). b. Estimate the cost of capital for the firm (Ipts). c. Estimate the return on capital for the firm (2pts)
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