Question: (Weighted average cost of capital) Alfa trading operates a quite successful chain of milk products and tea houses across the South Caucasus, Alfa plans to expand in Ukraine and Moldova, so it needs to raise some funds. The Company's balance sheet in USD is as follows:
Nowadays the company's common stock is selling for a price equal to 2 times its book value and the firm's investors require a 10 percent return. The firm's bonds command a yield to maturity of 6 percent, and the firm faces a tax rate of 20 percent. At the end of the previous year Alfa's bonds were trading near their par value.
a. What does Alfa's capital structure look like?
b. What is company's weighted average cost of capital?
c. If Alfa's stock price were to rise such that it sold at 3.5 times its book value required rate is increased to 15 percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?