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Car Corp has $200M in convertible debt with a 5% coupon. The coupons are paid annually. Similar non-convertible debt has a 6% yield to maturity. The convertible debt was issued at par and their current price is $900 per bond. The tax rate is 25%. The firm's stock sells for $5 per share and there are 60M shares outstanding. The levered equity beta is 1.6, the risk-free rate is 3% and the market risk premium is 6%.
a) Find the weighted average cost of capital. Please show your work.
Time 1 2 3 4
NOPAT 200 300 200 400
Net Investment in Operating Capital 100 100 50 100
b) The firm is expected to grow at 3% after year 4. Find the value of the operations. Please show your work.
c) Car Corp was offered $4000 from an interested buyer. Should they accept that offer? Explain.
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