Phillips Equipment Inc. has 72,000 bonds outstanding that are each selling at $1,066 in the market. Each bond has 8 years left to maturity, a $1000 face value and a coupon rate of 5%. Coupons are paid semiannually. The company also has 2.2 million shares of common stock outstanding. The common stock has a beta of 1.15 and sells for $41 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 9 percent. The corporate tax rate is 35 percent. (a) Determine the firms market value weight for debt (Enter answers as a % to 2 decimal places) (b) Determine the firms market value weight for equity (Enter answers as a % to 2 decimal places) [ (c) What is the firms after tax cost of debt? (Enter answers as a % to 2 decimal places) [ % (d) What is the firms cost of equity? (Enter answers as a % to 2 decimal places) 1% (e) Using the information you have found in the earlier parts, determine the Cost of Capital for Phillips Equipment Inc. (Enter answers as a% to 2 decimal places)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Phillips Equipment Inc. has 72,000 bonds outstanding that are each selling at $1,066 in the market. Each bond has 8 years left to
maturity, a $1000 face value and a coupon rate of 5%. Coupons are paid semiannually. The company also has 2.2 million shares of
common stock outstanding. The common stock has a beta of 1.15 and sells for $41 a share. The U.S. Treasury bill is yielding 2.3 percent
and the return on the market is 9 percent. The corporate tax rate is 35 percent.
(a) Determine the firms market value weight for debt (Enter answers as a % to 2 decimal places)
(b) Determine the firms market value weight for equity (Enter answers as a % to 2 decimal places) [
(c) What is the firms after tax cost of debt? (Enter answers as a % to 2 decimal places) [
%
(d) What is the firms cost of equity? (Enter answers as a % to 2 decimal places)
(e) Using the information you have found in the earlier parts, determine the Cost of Capital for Phillips Equipment Inc. (Enter answers as
a%% to 2 decimal places)
Transcribed Image Text:Phillips Equipment Inc. has 72,000 bonds outstanding that are each selling at $1,066 in the market. Each bond has 8 years left to maturity, a $1000 face value and a coupon rate of 5%. Coupons are paid semiannually. The company also has 2.2 million shares of common stock outstanding. The common stock has a beta of 1.15 and sells for $41 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 9 percent. The corporate tax rate is 35 percent. (a) Determine the firms market value weight for debt (Enter answers as a % to 2 decimal places) (b) Determine the firms market value weight for equity (Enter answers as a % to 2 decimal places) [ (c) What is the firms after tax cost of debt? (Enter answers as a % to 2 decimal places) [ % (d) What is the firms cost of equity? (Enter answers as a % to 2 decimal places) (e) Using the information you have found in the earlier parts, determine the Cost of Capital for Phillips Equipment Inc. (Enter answers as a%% to 2 decimal places)
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