[Iceberg_01]

Question...

McCoy Inc has equity with a market value of $40 million and debt with a market value of $20 million. The cost of debt is 6% semi-annually. Treasury bills that mature in one year yield 5% per annum, and the expected return on the market portfolio over the next year is 15%. The beta of McCoy's equity is 0.8. The firm pays no taxes.

A) What is McCoy's debt-equity ratio?

B) What is the firms weighted average cost of capital?

C) What is the cost of capital for an otherwise identical all-equity?

[Norman Londot]

McCoy, Inc. has equity with a market value of $40 million and
debt with a market value of $20 million.
The cost of the debt is 6 percent semi-annually.
Treasury bills that mature in one year yield 5 percent per annum,
and the expected return on the market portfolio over the
next year is 15 percent.
The beta of McCoy’s equity is 0.8 .The firm pays no taxes.

a. What is McCoy's debt-equity ratio?

b. What is the firm’s weighted average cost of capital?

c. What is the cost of capital for an otherwise identical all-equity firm?

1. A 10-year Corporate bond is issued with a face value of $100,000, paying interest of $2,500 semi-annually.
If market yields decrease shortly after the T-bond is issued, what happens to the bond’s:

a. price?

b. coupon rate?

c. yield to maturity?

Company ABC's earnings and dividends will grow at 5.0% monthly during the next five years.
Its growth will stop after year 5. In year 6 and afterward, it will pay out all earnings as dividends.
Assume next year’s EPS is $10 and the dividend is $5 and the market capitalization rate is 9 %.

What is ABC’s stock price?