Financial Management Project Question
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The following balance sheet extract relates to the Allied Insurance Company
Bonds Payable $1,000,000
Preferred Stock $2,000,000
Common Stock $3,000,000
Additional Information:
1. The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 90% of par.
2. The companyÂ’s common shares which have a book value of $25 per share are currently selling at $20 per share.
3. The preferred shares are 5% preferred shares with a book value of $100 per share. These shares are currently selling at $80 per share.
4. The company has an equity beta of 1.35 and the current Treasury bill rate is 3.0%. The market risk premium is 1.5%
5. The companyÂ’s tax rate is 30%.
A. Calculate AlliedÂ’s cost of debt. (4 points)
B. Calculate AlliedÂ’s cost of equity. (3 points)
C. Calculate AlliedÂ’s cost of preferred shares (3 points)
D. Estimate AlliedÂ’s market value weighted average cost of capital. (3 points)
E. Explain why the cost of debt is cheaper than the cost of equity. (2 points)
