El Paso Barns is a manufacturer of large livestock barns. The company has been in business for over 20 years and is publicly held. They have just hired you as their new financial analyst and have asked you to work on the follow project:
They are currently being financed with both debt and equity, but senior management is confused about their total cost of capital. You need to compute the weighted average cost of capital for the company. You have the following information:
The company has 50,000 shares of stock outstanding. The current selling price is $15. Based on historical returns, you believe the Beta for this stock should be about 1.5. The current risk free rate is 6% and the expected return on the market is 12%. · The company has also issued 400 bonds that are selling for 125% of par. The bonds have 24 years remaining to maturity and carry a coupon rate of 8%.
Their marginal tax rate is 40%.
1. Compute the cost of equity for El Paso Barns. Be sure to show your work in ALL answers!
2. Compute the before-tax cost of debt for EPB (remember you will need to compute the yield to maturity to find the before-tax cost of debt)
3. Compute the after-tax cost of debt for EPB.
4. Compute the weights you should use for equity and debt.
5. Compute the weighted average cost of capital for EPB.