Question Details

Calculate the market value of long-term debt 



1. Flagstaff Manufacturing- (FM) only debt is represented by 800,000 bonds with a market price per bond of $1,050. It has 20 million shares of common stock outstanding with a market price of $50 per share, and no preferred stock.

a.	Calculate the market value of long-term debt and common equity, and the percentage of capital obtained from each source.
b.	The bonds have a coupon rate of 7% and based on the market price of the bonds, the yield to maturity is 6%. FM has a 40% tax rate. Calculate the after-tax cost of debt financing.
c. Calculate the required return on common stock using CAPM.
d. FM does not plan to sell any additional shares of common stock this year and anticipates adding $20 million to retained earnings this year. Use the market value weights and your answers above to calculate the weighted average cost of capital (WACC).



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