Problem
You work in the finance department of Brom, Inc. The firm currently has a debt-to-asset ratio of 35%. The firm's outstanding debt is a single bond issue. These securities have a face value of $1,000, mature in 14 years, bear 5% (annual) coupons and are currently trading at 95.205% of par. The firm's current beta is 0.65. It faces the statutory 21% marginal tax rate. The current return on T-Bonds is 4% and the long-term market risk premium is 7%, therefore the firm's cost of equity financing is 8.55%.
• What is the the firm's cost of debt?
• What is Brom, Inc.'s weighted-average-cost-of-capital?
• According to the simple-version of the Hamada formula, what is the unlevered (asset) beta of Brom, Inc.'s stock?
• Brom, Inc. is considering increasing the amount of debt in their capital structure. If they raise their debt-to-asset ratio to 50%, what will be the beta of their stock at this new capital structure according to the the simple-version of the Hamada formula?
• If Brom, Inc. does change its debt-to-asset ratio to 50%, what will be the firm's cost of equity financing according to the the simple-version of the Hamada formula?
• If Brom, Inc. does change its debt-to-asset ratio to 50%, you feel that the cost of det financing will remain at its current level. If so, what will be the firm's weighted-average-cost-of-capital according to the simple-version of the Hamada formula?