Question

(This is a question from corporate finance)

Honeywell Automation Company currently has 1.5 million common shares of stock outstanding and the stock has a beta of 1.2. It also has $ 10 million face value of bonds that have five years remaining to maturity and 7.5% coupon with semi-annual payments and are priced to yield 7.2%. If the company issues up to $ 2.5 million of new bonds, the bonds will be priced at par and have a yield of 7.2%; if it issues bonds beyond $ 2.5 million, the expected yield on the entire issue will be 8.4%. The company management has learnt that it can issue new common stock at $ 10 a share. The current risk-free rate of interest is 4% and the expected market return is 11%. The company’s marginal tax rate is 25%. If the company raises $ 10 million of new capital while maintaining the same debt-to-equity ratio, what would be its weighted average cost of capital?​

Answer 1

Answer:

$10 million

Explanation:

25 percent

7.2 percent