Surgico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions):
In addition, you are provided the following information:
- The debt is in the form of long-term bonds, with a coupon rate of 10%. The bonds are currently rated AA and are selling at a yield of 12%. The market value of the bonds is 80% of the face value.
- The firm currently has 50 million shares outstanding, and the current market price is $80 per share.
- The stock currently has a beta of 1.2. The Treasury bond rate is 8% and the market risk premium is 5.5%. The tax rate for this firm is 40%
a. What is the debt-equity ratio for the firm in book value terms? In market value terms?
b. What is the firm's cost of equity?
c. What is the firm's after-tax cost of capital?