Acort Industries has 10 million shares outstanding and a current share price of $40 per share. It also has long- term debt outstanding. This debt is risk free, is four years away from maturity, has annual coupons with a coupon rate of 10%, and has a $100 million face value. The first of the remaining coupon payments will be due in exactly one year. The riskless interest rates for all maturities are constant at 6%. Acort has EBIT of $88 million, which is expected to remain constant each year. New capital expenditures are expected to equal Page | 6 depreciation and equal $13 million per year, while no changes to net working capital are expected in the future. The corporate tax rate is 25%, and Acort is expected to keep its debt-equity ratio constant in the future (by either issuing additional new debt or buying back some debt as time goes on). a. Based on this information, estimate Acort's WACC. b. What is Acort's equity cost of capital?

Acort Industries has 10 million shares outstanding and a current share price of $40 per share. It also has long- term debt outstanding. This debt is risk free, is four years away from maturity, has annual coupons with a coupon rate of 10%, and has a $100 million face value. The first of the remaining coupon payments will be due in exactly one year. The riskless interest rates for all maturities are constant at 6%. Acort has EBIT of $88 million, which is expected to remain constant each year. New capital expenditures are expected to equal Page | 6 depreciation and equal $13 million per year, while no changes to net working capital are expected in the future. The corporate tax rate is 25%, and Acort is expected to keep its debt-equity ratio constant in the future (by either issuing additional new debt or buying back some debt as time goes on). a. Based on this information, estimate Acort's WACC. b. What is Acort's equity cost of capital?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 15P

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