Your are right!
“Martin Corporation can now issue debt at 150 basis points over U.S. treasury bonds”
so you do, T-bond rate + 1.5% as the numerator.
Martin Corporation
Statement of Financial Position
December 31, 1994
(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 U.S. treasury bonds.
• The current risk-free rate (U.S. treasury bonds) is 7 percent.
• Martin's common stock is currently selling at $32 per share.
• The expected market return is currently 15 percent.
• The beta value for Martin is 1.25.
• Martin's effective corporate income tax rate is 40 percent.
Martin Corporation's current net cost of debt is:
a. 5.5 percent.
b. 7.0 percent.
c. 5.1 percent.
d. 8.5 percent.
FAR- 80
BEC- 75
AUD- 78
REG- ?
.