Question

Makai Metals Corporation has 9.1 million shares of common stock outstanding and 350,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7.9 percent, T-bills are yielding 5 percent, and the company’s tax rate is 40 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

	Market value weight
Debt	.5213 Correct
Equity	.4787 Correct

b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Discount rate 5.90 Incorrect  %

Answer 1

a)		Market        Value           [$ million]	MV Wt
	Debt (0.35*1100)	385.0	0.5203
	Equity (9.1*39)	354.9	0.4797
	Total	739.9
	There is a marginal difference between the answer shown in the
	question already answered. It should be what is calculated above.
b)	Before tax cost of debt = YTM.
	YTM (using an online calculator) =	2.84%
	After tax cost of debt = 2.84%*(1-40%) =	1.70%
	Cost of equity per CAPM = 5%+1.55*7.9% =	17.25%
	WACC = 1.70%*0.5203+17.25%*0.4797 =	9.16%