Determine xyz inc market value of bonds

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XYZ Inc. produces photographic equipment. Based on its balance sheet, it has 100,000 bonds with $100 par. Its bonds pay a semiannual coupon of 9% per year and have 3.5 years to maturity. The next coupon date is in 6 months. XYZ's current bond yield is 10% per year with semi-annual compounding. The beta of its common stock is 1.30 and the total market value of these stocks is $30 million. XYZ's also has retained earnings of $20 million in its balance sheet.

XYZ's management considers building a new plant. Management assumes that the beta of this project is equal to the company beta. The risk-free rate is 5% per year and the market risk premium is 7% per year. The corporation tax rate is 30%.

a) Determine XYZ Inc's market value of bonds.

b) Determine XYZ Inc's cost of equity.

c) Determine the after-tax annual discount rate for the plant.

Reference no: EM133001107

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