Am. 131. If Smolinski, Incorporated, were an all-equity company, it would have a beta of 1.05. Thecompany has a target debt-equity ratio of 55. The expected return on the marketportfolio is 10 percent and Treasury bills currently yield 3.2 percent. The company hasone bond issue outstanding that matures in 30 years, a par value of $1,000, and acoupon rate of 6.1 percent. The bond currently sells for $1,055. The corporate tax rate is24 percent.a. What is the company's cost of debt? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)b. What is the company's cost of equity? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)c. What is the company's weighted average cost of capital? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)a. Cost of debtb. Cost of equityc. WACC%%%

Step 1: Given Value for Calculation Beta = b = 1.05Debt Equity Ratio = de = 0.55Market Return = rm =…

Answered: If Smolinski, Incorporated, were an…

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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If Smolinski, Incorporated, were an all-equity company, it would have a beta of.95. The company has a target debt - equity ratio of .50. The expected return on the market portfolio is 12 percent and Treasury bills currently yield 3.1 percent. The company has one bond issue outstanding that matures in 25 years, a par value of $1,000, and a coupon rate of 6 percent. The bond currently sells for $ 1,050. The corporate tax rate is 23 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g ., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company' s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)
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