Question

1. Atlas Corp is a privately-held firm with an estimated market value-based D/E = 0.22 and a 6.5% cost of debt capital. The firm’s tax rate is 35%. You have identified a comparable firm that has an equity beta of 2.15, a D/E ratio of 0.80, an expected 7.0% cost of debt, and a 30% marginal corporate tax rate. If the risk- free rate is 4% and the market risk premium is 4.2%, what is your estimate of Atlas’s weighted average cost of capital (WACC)?

2. If, in addition to the convertible bonds described in the previous problem, NHT has 282 million common equity shares outstanding at $32.50 per share, short- term debt of $81.4 million, and long-term bank debt of $455.5 million. They also have $1,000 million face value of non-convertible debentures trading at 115.7% of par. These debentures have a coupon rate of 6.8%, paid semiannually and 10 years remaining to maturity. Finally, they have operating lease obligations of $44.7 million per year for the next 10 years (assume end-of-year payments). What are NHT’s capital structure weights for debt and equity?

Answer 1

the question is related to calculation of WACC.