The company A has 10 million shares of common stock outstanding. The stock currently trades at $4.85 per share. The company also issues 10 million debt with 7% interest rate and will be repaid in next two years. The firm can also obtain debt with the same interest rate in the future. Company A’s weighted average cost of capital is 10.5 percent. The tax rate is 35 percent. a. Construct company A’s market value balance sheet b. What is the company’s cost of equity capital? c. What is the company’s unlevered cost of equity capital? d. Company A is thinking to invest on a project cost $5 million. Should the company choose debt financing or equity financing assume the financial distress cost is zero? How about if the financial distress cost is not zero?

The company A has 10 million shares of common stock outstanding. The stock currently trades at $4.85 per share. The company also issues 10 million debt with 7% interest rate and will be repaid in next two years. The firm can also obtain debt with the same interest rate in the future. Company A’s weighted average cost of capital is 10.5 percent. The tax rate is 35 percent. a. Construct company A’s market value balance sheet b. What is the company’s cost of equity capital? c. What is the company’s unlevered cost of equity capital? d. Company A is thinking to invest on a project cost $5 million. Should the company choose debt financing or equity financing assume the financial distress cost is zero? How about if the financial distress cost is not zero?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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