Information : Use the following information about Rex Inc. for problems A-F. Com
ID: 1174537 • Letter: I
Question
Information:
Use the following information about Rex Inc. for problems A-F.
Common stock: 100,000 shares outstanding. $50 per share, beta=1.5
Bonds: 2,000 bonds outstanding, $1,000 face value each, 4% coupon paid semiannually, 21 years to maturity, market price of $995 per bond.
Market risk premium=5%, yield on 30 day Treasury Bill= 1%, effective tax rate = 21%
Question A
What is Rex Inc's Weight of Debt?
Question B
What is Rex Inc's Weight of Equity?
Question C
What is Rex Inc's Before Tax Cost of Debt?
Question D
What is Rex Inc's After Tax Cost of Debt?
Question E
What is Rex Inc's Cost of Equity?
Question F
What is Rex Inc's WACC?
Explanation / Answer
C. FV = 1000, PV = -995, N 20, N = 42
use rate function in Excel and multiply by 2
before tax cost of debt = 4.04%
D. after tax cost of debt = 4.04%*(1 - 0.21) = 3.19%
E. cost of equity = 1 + 1.5*5% = 8.50%
F.
WACC = 6.99%
Amount weight equity 5,000,000.00 0.7153 debt 1,990,000.00 0.2847