Company ASDF has 10 million of common shares outstanding, traded at $70 per share. Market beta of those shares is 0.8. Expected market return is 6% and risk-free rate is 1%. The company also has 1 million of preferred stocks outstanding. Each stock is traded at $105, has dividend rate of 8% and par value of $100; dividends are paid annually.1 It also has two bond issues outstanding. Bond A matures in 10 years, has face value of $1,000 and coupon rate of 10% (coupons are paid annually). Current market price of bond A is $1,200. Bond B is a zero-coupon bond, with face value of $1,000. It matures in 5 years and is currently traded at 80% of par. There are 100,000 bonds of type A and 20,000 bonds of type B issued. Tax rate is 15%.
(a) What is capital structure of the company (that is, what are weights of equity and debt in the company’s total value)?
(b) Suppose that ASDF plans to expand its operations by launching a project that has a risk profile common to existing ASDF’s projects. What rate should be used to discount cash flows of such a project?
