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The company has currently 20 000 shares outstanding. The book value per share is $20. The stock is currently trading at the P/B ratio of 2.0; P/E= 14 and EV/EBITDA=7.5. It is also known that the risk free rate is 2%, the beta of the stock is 2.0 and the market risk premium over risk free rate is equal to 5%. You may assume that the marginal tax rate on profits is 25%.

The company is going to issue 6 000 coupon bonds with the par value of $100 per bond, 6% annual coupon rate. Similar bonds currently trade at 4% yield level . The bonds will mature exactly 8 years from now.

Find:

a) Cost of debt and equity

b) The shares of debt and equity in capital structure

c) Find WACC and interpret your result?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92759576

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