Easy Car Corp is a grocery store located in the Southwest It

Easy Car Corp. is a grocery store located in the Southwest. It expects to pay an annual dividend of $6.30 next year to its shareholders and plans to increase the dividend annually at the rate of 5.0% forever. It currently has 600,000 common shares outstanding. The shares currently sell for $60 each. Easy Car Corp. also has 20,000 semlannual bonds outstanding with a coupon rate of 8.9141%, a maturity of 26 years, and a par value of $1,000. The bonds currently have a yield to maturity (YTM) of 10%. Te corporate tax rate is 20 %? Use 4 decimals in all your calculations (round final answers to two decimals). ? Etter using the %, for example if you obtain 0.20 then enler 20% 2. How many interest payments are left for the bond of Easy Corp.? the bond? Do not enter dollar sign. Round to two decimals A3. What is the interest payment per period for 4. What is the discount rate per period to use in pricing the bonds? Enter using the %, for example if you obtain 0.105 then enter 10.50% 5. What is the market value of equity for the calculation of the WACC for Easy? Do not enter dollar sign. Round to the nearest dollar (no decimals). Use comma to separate thousands Easy? Enter using the % and TWO decimal places, for example if you obtain 4.20% then enter 420% calculation of the WACC for Easy? Do not enter dollar sign. Round to the nearest dollar (no decimals). Use comma to separate thousands. What is the value of E/V? Enter using the % and TWO decimal places, for example if you obtain 4-20% then enter 4.20% capital (WACC) for Easy Corp.? Enter using the % and TWO decimal places, for example if you obtain 4-20% then enter 4.20% A . What is the cost of equity for What ls the market value of debt to be used in the What is weighted average cost of

Solution

Solution :

We would answer the 1st question alone :

What is the cost of debt for Easy Corp:

Cost of debt is nothing but the cost at which the company issues the bond to the investors and it is the cost to the company which they will bear. In the above example, they have given the YTM which is yield to maturity and hence we will calculate the cost of debt by applying the tax rate shown below :

The yield to maturity is the annual return from an investment purchased today and held till maturity, i.e., it is the rate at which the current market price of the bond is equal to the present value of all the cash flows from the bond.

Hence the cost of debt = YTM * tax rate = 10% (1-0.2) = 8% is the cost of debt.