Ohio Inc. has a beta of 1.6 and its debt-to-equity ratio is 0.8. The risk-free rate...

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Ohio Inc. has a beta of 1.6 and its debt-to-equity ratio is 0.8.The risk-free rate is 3.2% and the market risk premium is 9%.Although Ohio is a U.S. firm, it issued Swiss Franc (SF)denominated bond and converted SF to US dollar. The semi-annualinterest payment is made in SF. The coupon rate is 8%, the price ofthe bond is SF1,040, the face value is SF1,000 and the bond maturesin 10 years. The exchange rate is expected to move from SF0.9800/$to SF0.9600/$. Ohio's tax rate is 40%.
a. What's Ohio's SF cost of debt?
b. What's your best estimate of Ohio's US dollar cost ofdebt?
c. What's Ohio's cost of equity?
d. What's Ohio's WACC?

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4.1 Ratings (664 Votes)

a Cost of debt Pv Price of bond 1040 Nper Number of semi annual period 20 Pmt Semi annual interest payment 40 100082 Fv Payment at maturity 1000 RATE Semi annual yield to maturity 371 Using RATE function of excelwith See Answer

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Ohio Inc. has a beta of 1.6 and its debt-to-equity ratio is 0.8.The risk-free rate is 3.2% and the market risk premium is 9%.Although Ohio is a U.S. firm, it issued Swiss Franc (SF)denominated bond and converted SF to US dollar. The semi-annualinterest payment is made in SF. The coupon rate is 8%, the price ofthe bond is SF1,040, the face value is SF1,000 and the bond maturesin 10 years. The exchange rate is expected to move from SF0.9800/$to SF0.9600/$. Ohio's tax rate is 40%.a. What's Ohio's SF cost of debt?b. What's your best estimate of Ohio's US dollar cost ofdebt?c. What's Ohio's cost of equity?d. What's Ohio's WACC?