Weight Average Cost of Capital

Twin Lakes Research Inc. (TLRI) is financed as follows. It has 250,000 common shares issued and outstanding, which were priced at $40 this afternoon. The expected return on the market is 8%, 90-day Government of Canada T-bills are yielding 2%, and TLRI’s common stock’s Beta is 1.5. TLRI also has 100,000 preferred shares issued and outstanding, which pay out a dividend of $2.00 per year and are currently valued in the market at $25 per share. Bondholders have lent TLRI $5,000,000 in bonds with a 6% semi-annual coupon and maturing in 10 years. These bonds now yield 7% compounded semi-annually and have a market value of $4,644,700. TLRI has a marginal corporate tax rate of 20%.

a. What is the market value of TLRI’s common shares?

b. What is the market value of TLRI’s preferred shares?

c. What is the total market value of TLRI?

d. What propor0on of TLRI is financed with common stock?

e. What propor0on of TLRI is financed with preferred stock?

f. What propor0on of TLRI is financed with debt?

g. What is the expected return on TLRI’s common stock?

h. What is the expected return on TLRI’s preferred shares?

i. What is the yield to maturity on TLRI’s long-term debt?

j. What is TLRI’s weighted average cost of capital?