The capital structure of Truman Industries, Inc. consists of bonds and common stock equity. TI’s tax rate is 30%. The details on the various components of its capital structure are as follows:
Bond:
Type: Fixed Semi-annual Coupon, Non-callable
Maturity: 15 Years
Coupon rate: 8.00%
Par Value: $1,000
Current price: $950
Common Stock:
Beta: 1.2
Risk free rate: 4.0%
Expected return of the market: 12.00%
a) What is the after-tax cost of debt of Bond?
b) What is the after-tax cost of equity of the Common Stock of TI?
c) Truman’s target capital structure consists is 60% debt with remainder in equity financing. Using costs of debt and equity in two parts above find TI’s WACC.