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A firm has the following book value capital structure:
Bonds ($1,000 par, 8% annual coupon, mature in 5 years) that have a total par value of $5,000,000
Common ($4 par par) 4,000,000
Retained earnings =1,000,000
Totals 10,000,000
The bonds have a yield to maturity of 5%. The common stock is trading at $3.00 per share. The firm has a beta of 0.75, the risk-free rate of 4%, and expected market return is 11%. Their tax rate is 15%. Estimate this firm's weighted cost of capital.
The YTM on a bond is the interest rate you earn on your investment if interest rates don't change.
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