Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...

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Finance

Ramblin Wreck is a firm specializing in engineering components.The firm is publicly traded and is considering the followingproject:
The project will last 5.00 years with an annual cash flow of$40.00 million. The project will require an initial investment of$140.00 million
The firm must determine the cost of capital to evaluate theproject. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
STOCK DATA: BOND DATA:
Current Price Per Share $29.00 Current Price Per Bond $936.00
# of Shares 2.00 million # of bonds 20,000.00
Book Value $50 million Annual Coupon Rate 8.00%
Face Value Per Bond $1,000
Maturity 10 years

The risk free rate in the economy is currently 2.00%, whileinvestors have a market risk premium of 8.00%. Ramblin Wreck, Inc.has a beta of 1.42. The tax rate is 36.00%.
a) What is the yield to maturity on Ramblin Wreck, Inc.bonds?
b) What is the cost of equity?
c) What is the weight in debt for the project?

STOCK DATA:		BOND DATA:
Current Price Per Share	$29.00	Current Price Per Bond	$936.00
# of Shares	2.00 million	# of bonds	20,000.00
Book Value	$50 million	Annual Coupon Rate	8.00%
		Face Value Per Bond	$1,000
		Maturity	10 years

Answer & Explanation Solved by verified expert

4.4 Ratings (734 Votes)

K = N

Bond Price =? [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =10

936 =? [(8*1000/100)/(1 + YTM/100)^k] + 1000/(1 + YTM/100)^10

k=1

YTM% = 9

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 2 + 1.42 * (8)

Expected return% = 13.36

Total Firm value = price of Debt*Shares of Debt + price of Equity*Shares of Equity

=936*20000+29*2000000

=76720000

Weight of Debt = price of Debt*Shares of Debt/Total Firm Value

= 18720000/76720000

=0.244

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Transcribed Image Text

Ramblin Wreck is a firm specializing in engineering components.The firm is publicly traded and is considering the followingproject:The project will last 5.00 years with an annual cash flow of$40.00 million. The project will require an initial investment of$140.00 millionThe firm must determine the cost of capital to evaluate theproject. (The project is within the firm’s normal activities)Ramblin Wreck, Inc. Financial Data:STOCK DATA:BOND DATA:Current Price Per Share$29.00Current Price Per Bond$936.00# of Shares2.00 million# of bonds20,000.00Book Value$50 millionAnnual Coupon Rate8.00%Face Value Per Bond$1,000Maturity10 yearsThe risk free rate in the economy is currently 2.00%, whileinvestors have a market risk premium of 8.00%. Ramblin Wreck, Inc.has a beta of 1.42. The tax rate is 36.00%.a) What is the yield to maturity on Ramblin Wreck, Inc.bonds?b) What is the cost of equity?c) What is the weight in debt for the project?