Kose’s balance sheet shows that 1,000,000 shares of common stock are outstanding. Total assets are $26,000,000 and total debt is $10,000,000. The marginal corporate tax rate is 30%. Assume the company’s stock trades at $20/share. The next dividend is expected to be $1 and long-term growth is estimated at 5%. Assume that all of the Kose’s debt stems from 8% coupon rate bonds that are trading so that their YTM is 9%.
What is the after-tax cost of debt for capital budgeting purposes?
What is the cost of equity for capital budgeting purposes?
What is the Kose’s weighted average cost of capital? Use the book value of debt and the market value equity for your weights?