Reference no: EM132856751
Strolling Corporation is constructing its Cost of Capital schedule. The firm is at its target capital structure. Its 15 year bonds have a 3.5% coupon rate and sell for $944. Bond coupons are semi-annual. Rolling's stock beta is 1.3, the risk-free rate is 3.0%, and the return on the market portfolio is 7.0%. Rolling is a constant growth firm, and will pay a dividend of $1.50 at the end of next year. The stock sells for $45.00 and has a growth rate of 5.1%. The firm's tax rate is 30%.
The firm's book value balance sheet is as follow:
Assets $35,600,
Long term Debt $36,000,
Equity ($1.00 par) $3,874,
Retained Earnings -$4,274,
Comprehensive Income 1,500.
Problem 1: To the nearest .1%, what is the weight of debt that should be used in computing the Weighted Average Cost of Capital?
Problem 2: To the nearest .1%, what is the pre-tax cost of debt?
Problem 3: The the nearest .1%, what is the cost of retained earnings using the Constant Growth Model?
Problem 4: To the nearest .1%, what is the cost of equity using the Constant Growth Model?
Problem 5: Using your Constant Growth Model cost of equity, to the nearest .1%, what is Strolling's Weighted Average Cost of Capital?
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