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1. You have been asked to analyze the capital structure of Stevenson Steel. The company...

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Finance

1. You have been asked to analyze the capital structure of Stevenson Steel. The company has supplied you with the following information:

  • There are 100 million shares outstanding, trading at $ 10 a share.

  • The firm has bond outstanding of $500 million (in market value) in total. Each bond has a coupon rate of 6% with semiannual payment and 10 year maturity. Current price of each bond is quoted at 96.7.

  • The beta for the firm currently is 1.04, the risk free rate is 5% and the market risk premium is 5.5%.

  • The expected dividend payment for the next year is $0.5/share, and it is expected to grow at 5% every year.

  • The tax rate is 40%.

a. Estimate the current equity cost of capital for Stevens Steel. Please use all the possible methods and then take the average as your final estimate.

b. Estimate the current debt cost of capital for Stevens Steel. c. What is the firms pretax WACC and aftertax WACC?

e. Now assume that you have computed the optimal debt-to-equity ratio to be 75%. If it moves to the optimal debt level, estimate the new after-tax cost of capital according to MM theory.

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