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1) ABC Manufacturing is major producer of farm equipment. Presently, firm has two divisions: machinery division and farm implement division – each have various degrees of risk. You have got the following partial information for ABC Manufacturing:

Debt

Bond A 10 year bond 9% paid semi-annually issued 2008 $1,000,000
Bond B 15 year bond 6% paid semi-annually issued 2010 $4,000,000
Bond C 3 year bond 5% paid semi-annually issued 2012 $1,000,000
Total bonds issued and outstanding $6,000,000
Common Equity
Common Shares $200,000
Contributed Surplus $1,800,000
Retained Earnings $2,000,000
Total Equity $4,000,000

You observe that thirty day Government T-bills are selling to yield 0.2432445% or 3% per year and market risk premium for firm is= 10%. Average beta for firm is 1.4. Firm has marginal tax rate of= 40%. Company shares are presently selling in market for= $56.55 and firm just paid its most current dividend of= $8.00. Management expects to be able to maintain a growth rate of 2.5% forever.

a) Based on information given above, compute the cost of borrowing by using debt for present company.

Requirements
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Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M915171

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