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Solve the firm weighted average cost of capital

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Reference no: EM132966023

a. Harrell Corporation is evaluating a capital budgeting project with risk very similar to their current line of business.

b. The company has 10 million shares of common stock outstanding that currently sell for $43 per share and has a par value of $24 per share. The company pays a dividend of $2 per share and has a beta of 1.5.

c. The company also has long term debt. The bonds have a coupon of 7.0% and makes payments semi-annually. The bonds have a par value of $1000 and currently sell for 104.5% of par value. They were issued 6 years ago and currently have 14 years left to maturity. The company has 140,000 bonds outstanding,

Financial analysts estimate that the market risk premium over 10-year Treasury Bonds is 5 percent. Treasury Bonds currently yield 4 percent and Treasury Bills yield 2 percent. The company pays an average tax rate of 19 percent and a marginal tax rate of 23 percent.

Problem 1: Calculate the after-tax cost of debt.

Problem 2: Calculate the after-tax cost of equity.

Problem 3: Calculate the firm's weighted average cost of capital.

Problem 4: Explain the types of projects that you use the weighted average cost of capital for and explain your decisions made in calculating the cost of debt and the cost of equity.

Reference no: EM132966023

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