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Question #1 You need to estimate the weighted average cost of capital (WACC) for a company. You have the following balance sheet data as well as the information provided below: Assets Current Assets Net Plant, Property and Equipment $128,250,000 $340,875,000 Total Assets $469,125,000 Liabilitites and Equity Accounts Payable Accruals Notes Payable Current Liabilities $32,625,000 $30,375,000 $1,125,000 $64,125,000 Long-term Debt (135,000 bonds, $1,000 face value) Total Liabilities $135,000,000 $199,125,000 Common Stock (33,750,,000 shares outstanding) Retained Earnings Total Sharesholders Equity $101,250,000 $168,750,000 $270,000,000 Total Liabilities and Sharesholders Equity $469,125,000 25% debt equity You also have the following information: 1 Current Stock Price $7.50 2 The company's long-term debt consists of a single bond issue (135,000 bonds) with the following properties: Current bond price $1,015.75 Years to Maturity 8 Coupon Rate 6.00% Payments semi-annual 3 The company does not view or treat its short term debt as a source of permanent financing. It will be paid off by the end of the year. 4 The company's Beta = 1.6 5 The company plans to change its capital structure within the next 6 months The Proposed D/E ratio = 25% 6 US Treasury Securities Yields 6-Month Treasury Note 20-Year Treasury Bond 0.04% 2.28% 7 The expected equity risk premium = 5.50% 8 Tax Rate = 25% Hint: D/D+E=D/E/(1+D/E) and E/D+E=1-D/D+E a) Using the Security Market Line (CAPM) method, what is the best estimate for the company's cost of equity at the proposed 50% D/E capital structure? (10 pts) b) What is the best estimate for the after-tax cost of debt? (5 pts) c) What is the best estimate for the company's WACC at the proposed new capital structure? (5 pts)

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