The shares are priced such that the firm's P/E multiple

A company has the following securities outstanding: – 1 million shares of common stock. The shares are priced such that the firm’s P/E multiple is 10, i.e. the price per share is 10 times the earnings per share. – 1,000 perpetual bonds, each with a face value of $1,000, a coupon rate of 10% (paid once a year) and a current yield (an effective annual rate) of 8%. These bonds will pay annual interest every year for ever and there will be no principal paid back. (happens at infinity). The firm has EBIT every year, of 500,000, and pays out all of its net income as dividends. The tax rate is 30%. The risk free rate and the expected risk premium on the market are both 7%. QUESTION: What is the current market value of the firm’s equity and debt? QUESTION PART 2: What is the required rate of return on the firm’s equity? What is the beta of the equity? QUESTION PART 3: What is the firm’s after tax WACC?

 

 

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