Amazon has 25,000 bonds outstanding, each with a face value of $1,000. 15,000 of the 30,000 bonds pay a semi-annual coupon of 6% p.a. with 10 years left to maturity and an effective annual yield to maturity of 7%. 10,000 of the 30,000 bonds pay an annual coupon of 10% p.a. with 10 years left to maturity and an effective annual yield to maturity of 9%. The most recent coupon for both types of bonds have just been paid. Amazon’s effective tax rate is 25%. Amazon has 11 million ordinary shares outstanding which are currently trading at $5 per share. Amazon beta is 1.5, the risk-free rate is 6%, and the expected return on the market portfolio is 16%. Using the capital asset pricing model to estimate the cost of equity, what is Amazon’s after-tax weighted average cost of capital?
Amazon has 25,000 bonds outstanding, each with a face value of $1,000. 15,000 of the 30,000 bonds pay a semi-annual coupon of 6% p.a. with 10 years left to maturity and an effective annual yield to maturity of 7%. 10,000 of the 30,000 bonds pay an annual coupon of 10% p.a. with 10 years left to maturity and an effective annual yield to maturity of 9%. The most recent coupon for both types of bonds have just been paid. Amazon’s effective tax rate is 25%. Amazon has 11 million ordinary shares outstanding which are currently trading at $5 per share. Amazon beta is 1.5, the risk-free rate is 6%, and the expected return on the market portfolio is 16%. Using the capital asset pricing model to estimate the cost of equity, what is Amazon’s after-tax weighted average cost of capital?
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 15P
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Question
Amazon has 25,000 bonds outstanding, each with a face value of $1,000.
15,000 of the 30,000 bonds pay a semi-annual coupon of 6% p.a. with 10 years left to maturity and an effective annual yield to maturity of 7%.
10,000 of the 30,000 bonds pay an annual coupon of 10% p.a. with 10 years left to maturity and an effective annual yield to maturity of 9%.
The most recent coupon for both types of bonds have just been paid. Amazon’s effective tax rate is 25%.
Amazon has 11 million ordinary shares outstanding which are currently trading at $5 per share.
Amazon beta is 1.5, the risk-free rate is 6%, and the expected return on the market portfolio is 16%.
Using the capital asset pricing model to estimate the cost of equity , what is Amazon’s after-tax weighted average cost of capital?
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