Question

Hartford Mining has 70 million shares that are currently trading for $ 3 per share and $ 60 million worth of debt. The debt is risk free and has an interest rate of 3 % ?, and the expected return of Hartford stock is 12 % . Suppose a mining strike causes the price of Hartford stock to fall 27 % to $ 2.19 per share. The value of the? risk-free debt is unchanged. Assuming there are no taxes and the risk? (unlevered beta) of? Hartford's assets is? unchanged, what happens to? Hartford's equity cost of? capital?

what is the Equity cost of capital is ?%. ?? (Round to two decimal? places.)

Answer 1

Answer

STEP 1 : Calculate WACC of Hartford

• Value of Equity = 70000000 shares * $3

= $ 210000000 (ie 210 million)

• Value of Debt = $ 60000000 (ie 60million)
• Total Capital = $ 210000000 +  $ 60000000 = $ 270000000 (ie 270million)
• Cost of Equity = 12%
• Cost of Debt = 3%

WACC = Ke * We (+) Kd * Wd

= 12 * (210/270) (+) 3 * (60/270)
= 9.33% (+) 0.67%

= 10%

STEP 2 : Calculation of Revised Cost of Equity

Now Revised Equity = 70million shares * $2.19 = $ 153.3million

Ke = WACC + (WACC - Kd) * Debt/Revised Equity

Ke = 10% + (10% - 3%) * 60/153.3

Ke = 10% + 7% * 0.391389

Ke = 12.74 % approx