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Question - Assume Teatree Co. is a social media company which currently has 25 million number of shares, trading at $15 per share. The outstanding debt has a book value of $120 million and a market value of $150 million and the equity has a book value of $300 million. The stock has a beta of 1.4, and market risk premium is around 7%. Currently a 10-year government bond is yielding at 3%, and Teatree Co. has an AA rating, which shows a default spread of 70 basis point over the treasury bond. The tax rate for Teatree Co. is 30% and this Co. just reported a full year EBIT of 100million.
Required -
A. Calculate the company's current cost of capital.
B. Assume that Teatree Co. is already in a stable growth phase, and currently is maintaining a reinvestment rate of 20%. The total capital value can be calculated based on current market value, please calculate the present value today for Teatree Co.'s terminal value.
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