Reference no: EM132530972

The following information is available for Solley Corporation:

Debt: 5,000 bonds outstanding that are selling for 96 percent of par; bonds with similar characteristics are yielding 8.5 percent, pretax.

Common stock: 43,800 shares outstanding, selling for €51 per share; the beta is 1.54.

Preferred stock: 10,000 shares of 7 percent preferred stock outstanding with a stated value of €100 per share, currently selling for €83 per share.

Market: 7.5 percent market risk premium and 3.6 percent risk-free rate.

Assume the company's tax rate is 21 percent.

Instructions:

1. Calculate the firm's market value capital structure.

2. Calculate the firm's costs of common equity, preferred stock and debt. 

3. Calculate the weighted average cost of capital (WACC). 

4. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the company's typical project? Explain.

5. What happens if we use the WACC as the discount rate for all projects? Explain.

6. Which is more relevant, the pretax or the after-tax cost of debt? Explain.

7. Which are more relevant, the book or market value weights? Explain.