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What is firm as weighted average cost of capital

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Question - Firm A has issued a total of 2 million corporate bonds with a maturity of 10 years and a coupon rate of 5 percent. Coupon payments occur once per year, and the face value of firm A's bonds is $1,000. The current market price for one of the bonds issued by firm A is $830.

Firm A plans to issue 8 million equity shares to be traded on public exchanges. Each share is expected to pay a $9 cash dividend after one year, and the firm's CFO forecasts earnings per share of $24 for the year ahead. Firm A's return on equity is 16 percent. Under these conditions, the beta of firm A's common stock is estimated at -0.1, and the beta of firm A's assets is estimated at 0.5.

1. Use data from Yahoo! Finance to determine the appropriate market return.

2. Use data from Yahoo! Finance to determine the appropriate risk-free rate.

3. What is firm A's financing structure?

4. What is firm A's cost of debt?

5. What is firm A's cost of equity?

6. What is firm A's weighted average cost of capital?

7. What should be the price of one share of firm A's stock?

8. Firm A's CFO suggests issuing another 1 million corporate bonds in addition to the 2 million already issued at the same market price of $830. What effect would this have on the IPO price of firm A's stock?

Reference no: EM133136837

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