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Risk-free rate 0.016 Market rate 0.078 Tax rate 30%



Common stock

Interest rate




7 yr, B rated bond issue

Shares outstanding


Price per bond


Price per share


Number issued


Use the chart above to answer questions 1-6. Refer to the ratings chart in the slides to find the yield to maturity on the bond issue.

  1. What are the weights the bond issue and loans contribute to the company’s overall debt?
  2. What is the after-tax weighted average cost of debt?
  3. Using the CAPM, what is the required return on the company’s common stock?
  4. What is the market value of the firm’s common stock?
  5. What are the weights the debt and equity contribute to the company’s capital?
  6. What is the weighted average cost of capital?
  7. If the firm has a project with an expected return of 5%, should the firm invest in the project? Justify your answer.

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