the long term debt was originally issued at par 1 000 bond and is currently trading 629705

Aug 30, 2021 | Uncategorized

Items 1 and 2 are based on the following information:

Martin Corporation
STATEMENT OF FINANCIAL POSITION
December 31, 2004
(Dollars in millions)

Assets

Current assets

$

75

Plant and equipment

250

Total assets

$

325

Liabilities and shareholders’ equity

Current liabilities

$

46

Long-term debt (12%)

64

Common equity:

Common stock, $1 par

10

Additional paid in capital

100

Retained earnings

105

Total liabilities and shareholders’ equity

$

325

Additional data

  • The long-term debt was originally issued at par ($1,000/bond) and is currently trading at $1,250 per bond.
  • Martin Corporation can now issue debt at 150 basis points over US Treasury bonds.
  • The current risk-free rate (US Treasury bonds) is 7%.
  • Martin’s common stock is currently selling at $32 per share.
  • The expected market return is currently 15%.
  • The beta value for Martin is 1.25.
  • Martin’s effective corporate income tax rate is 40%

Martin Corporation’s current net cost of debt is

  1. 5.5%
  2. 7.0%
  3. 5.1%
  4. 8.5%

Using the Capital Asset Pricing Model (CAPM), Martin Corporation’s current cost of common equity is

  1. 8.75%
  2. 10.00%
  3. 15.00%
  4. 17.00%