Price per unit of RMM’s debt is $93.45 and there are 4000 units of debt. The price per unit of common stock is $50 and there are 10,000 units of common stock. The debt has a face value of $100, 10% coupon rate, and 10 years to maturity. The common stock has a standard deviation of return equal to 40% and a correlation coefficient between its return and SP500 return of 0.8. The S&P500 has a return of 12.5% and a standard deviation of return equal to 20%. The T-bill rate is 3.5%. RMM has a tax rate of 30%
(1) Determine the cost of common stock, and the after tax cost of debt.
(2) What is the capital structure of RMM? (How much of the capital is raised by issuing common stock and debt, respectively?)
(3) Determine the weighted average cost of capital.
(4) If the expected return on an RMM’s investment is 10%, is this investment acceptable? Why or why not?