Compute the cost of borrowing by using debt

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Reference no: EM139397

Q. ABC Manufacturing is major producer of farm equipment. Presently, firm has two divisions: machinery division also farm implement division - each have various degrees of risk. You have got the following partial information for ABC Manufacturing:
Debt
Bond A 10 year bond 9% paid semi-annually issued 2008 $1,000,000
Bond B 15 year bond 6% paid semi-annually issued 2010 $4,000,000
Bond C 3 year bond 5% paid semi-annually issued 2012 $1,000,000
Total bonds issued also outstanding $6,000,000
Common Equity
Common Shares $200,000
Contributed Surplus $1,800,000
Retained Earnings $2,000,000
Total Equity $4,000,000
You observe that thirty day Government T-bills are selling to yield 0.2432445% or 3% each year also market risk premium for firm is= 10%. Average beta for firm is 1.4. Firm has marginal tax rate of= 40%. Company shares are presently selling in market for= $56.55 also firm just paid its most current dividend of= $8.00. Management expects to be able to maintain a growth rate of 2.5% forever.

Based on information given above, compute the cost of borrowing by using debt for present company.

Reference no: EM139397

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