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(solution) g. Johnson Company's stock price is $25 per share and it has 4


g. Johnson Company?s stock price is $25 per share and it has 4 million shares outstanding. Johnson Company has 70,000 10% annual coupon bonds with a par value of $1,000 each. The maturity of the bonds is 10 years and the YTM is 10.843%. The expected market return, rm, is 16% and Johnson?s stock beta, ?S, is 1.4. The risk-free rate of interest, rf, is 7% and the corporate tax rate, tc, is 34%.

1. Calculate the bond-to-stock ratio of Johnson Company.

2. Calculate the Johnson Company?s weighted average cost of capital, rwacc.

3. Johnson Company plans to invest $100 millions in a new soccer ball machine that produces an unlevered pre-tax cash flow of $25 million in perpetuity? The risk of the project is similar to Johnson's overall risk. Should Johnson Company invest in the new machine?


Bond Price

 

Interest 100 5.928204 592.8204387

 

1000 0.357205 357.2047984

 

950.025237 Market Value of bond

 

MV of stocks

 

1

 

Bond to stock ratio 66501766.59

 

100000000

 

66.50% 2

 

After tax cost of debt

 

Cost...

 


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