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Calculate stepping razor weighted average cost of capital

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Reference no: EM132965871

Stepping Razor Ltd is currently considering investing in a capital project. The following information has been provided:

Debt

The company currently has 4,500, 5% coupon, semi-annual bonds. The bonds are trading at 85% of par and have 15 years to maturity.

Common Stock

150,000 shares are in issue, trading at $60. Stepping razor's common stock has a beta of 1.35. The Treasury Bill rate is 5%, while the average stock returns 8%.

Preferred Stock

These 7%, $100 par securities currently trade at $125. The company has issued a total of 23,000 to date. The corporate tax rate is 40%.

Required:

Problem a. Calculate:

i. The total market value of the company
ii. Stepping Razor's weighted average cost of capital

Problem b. Sandra Hamilton, a senior member of the Marketing Department has taken an interest and has asked you to explain the process. Prepare a memo to Ms. Hamilton outlining:

i. The use of the wacc, as opposed to a single-project rate in making this decision
ii. The benefits of using market-value rather than book value in calculating component weights
iii. Why it might have been more appropriate to use the CAPM method of calculating the cost of equity rather than the DCF approach

Reference no: EM132965871

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