Question 17 The following balance sheet extract relates to the ABC Company. Bonds Payable $1,200,000 Common Stock $3,000,000 Preferred Shares $1,550,000 Additional Information: i. The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 90% of par. ii. The companyâs common shares which have a book value of $25 per share are currently selling at $22 per share. The beta on the companyâs stock is 1.10 iii. Preferred shares have a book value of $100 per share. These shares are currently sellingat $115 per share and carries a coupon rate of 6%. iv. Market Risk premium is 6 % and 4% is the risk-free rate. v. The companyâs Tax rate is 30% A. Required: Determine the following for the company
(a) Total Market value
(b) After-tax Cost of Debt
(c) Cost of Common Stock
(d) Cost of Preferred Stock
(e) WACC
B. What is the best proxy for the risk-free rate when using the CAPM to calculate the cost of equity? Explain the reasons for your answer.
Question 17 The following balance sheet extract relates to the ABC Company. Bonds Payable $1,200,000 Common Stock $3,000,000 Preferred Shares $1,550,000 Additional Information: i. The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 90% of par. ii. The companyâs common shares which have a book value of $25 per share are currently selling at $22 per share. The beta on the companyâs stock is 1.10 iii. Preferred shares have a book value of $100 per share. These shares are currently sellingat $115 per share and carries a coupon rate of 6%. iv. Market Risk premium is 6 % and 4% is the risk-free rate. v. The companyâs Tax rate is 30% A. Required: Determine the following for the company
(a) Total Market value
(b) After-tax Cost of Debt
(c) Cost of Common Stock
(d) Cost of Preferred Stock
(e) WACC
B. What is the best proxy for the risk-free rate when using the CAPM to calculate the cost of equity? Explain the reasons for your answer.