Lam Research Corporation has 5 bonds outstanding rated AAA. Each bond has a face value of $1,000, pays an annual coupon payment of $45, matures in 6 years, and trades at a price of $1,026. Lam has no preferred stock outstanding but does have 2,000 shares of stock outstanding. The stock trades at a price of $7 per share. Lam’s beta is 1.19. The risk-free rate is 1.9% and the expected return on the market is 10.25%. The corporate tax rate is 21%. Given this information, what is Lam’s weighted average cost of capital?
Lam Research Corporation has just announced that their debt has been downgraded and is now rated CCC. This news has made the price of Lam’s bonds drop to $500. Historically, CCC rated debt defaults 12.2% of the time. If Lam defaults on their debt, bond holders can expect to lose $0.50 for each dollar invested. Given no other changes regarding Lam’s debt from the previous question, what is the cost of Lam’s debt now?
