The following balance sheet extract relates to the ABC Company. Bonds Payable $1,200,000 Common Stock $3,000,000 Preferred Shares $1,550,000 Additional Information: i. The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 90% of par. ii. The company’s common shares which have a book value of $25 per share are currently selling at $22 per share. The beta on the company’s stock is 1.10 iii. Preferred shares have a book value of $100 per share. These shares are currently sellingat $115 per share and carries a coupon rate of 6%. iv. Market Risk premium is 6 % and 4% is the risk-free rate. v. The company’s Tax rate is 30% A. Required: Determine the following for the company
(a) Total Market value
(b) After-tax Cost of Debt
(c) Cost of Common Stock
(d) Cost of Preferred Stock
(e) WACC
B. What is the best proxy for the risk-free rate when using the CAPM to calculate the cost of equity? Explain the reasons for your answer.