Question

18. Ohio Ine. has a beta of 1,2and its deb-to-equity ratio id 1.5. The risk-free rate is 31% and the market riskpremiumis 7%. Although Ohio saUS firm, it issued Swiss Fran c (SF) denominated bond and converted SF to US dollar. The semi-annual interest payment is made in SF. The coupod rate is 8%the price of the bond is SF1,035, the face value is SE1.000. and the bond matures in 5 vears. The exchange rate is expected to move from, F09200/StoSFO.9000 $. Ohio Stax ates40% (14 points) a. What's Ohio's SF cost of debt? b. What's your best estimate of Ohio's US dollar cost of debt? c. What's Ohio's cost of equity? d. What's Ohio's WACC?

Answer 1

Answer(a):

Cost of debt is the Yield to maturity.

YTM (formula) = [C + (F-P) /n] / (F+P) / 2

C = 1000*8%*1/2 = $40, n: 5*2 = 10 periods

YTM = [40 + (1000-1035) / 10] / (1000+1035) / 2

Cost of debt (YTM) = 7.16%

Answer(c): Cost of equity from CAPM-

Re = Rf + Beta (Mprm)

Mprm is the market risk premium

Re = .038 + 1.2 (.07)

Cost of equity (Re) = 12.2%

Answer(d): WACC = (E/V) * Re + (D/V) * Rd (1-Tc)

Total debt: 1035 * 1000 = $1035000

Total Equity: 1035000/1.5 = $690000

Total value: 1035000 + 690000 = $1725000

(Ommission of 0)

WACC = (690 / 1725) * .122 + (1035/1725) * .0716 (1-.40)

WACC = .0488 + .025776

WACC = .074576 or 7.46%