Question

Phillips Equipment has 75,000 bonds outstanding that are each selling at $1080 in the market. Each bond has 10 years left to maturity, a $1000 face value and a coupon rate of 5%. Coupons are paid semiannually. The company also has 2 million shares of common stock outstanding. The common stock has a beta of 1.1 and sells for $30 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 6 percent. The corporate tax rate is 34 percent.

(a) Determine the firms market value weights for debt and equity. Enter answers below as a percentage to 2 decimal places, but do NOT include the % sign.

Market Value weight of DEBT is

Market Value weight of EQUITY is

(b) What is the firms after tax cost of debt?  Enter answer below as a percentage to 2 decimal places, but do NOT include the % sign.

The firms after tax cost of debt is

c) What is the firms cost of equity?  Enter answer below as a percentage to 2 decimal places, but do NOT include the % sign.

The firms cost of equity is

(d) Assume that the weights for debt and equity that your found in part (a) are 60% (for debt) and 40% (for equity). Using these weights find the firms weighted average cost of capital.   Enter answer below as a percentage to 2 decimal places, but do NOT include the % sign.

The WACC is

Answer 1