22) A. John & Son Canada Corp has the following capital structure.
2)5.5% Straight bond ----10 million
3)7.5% Preferred stock ----10 million
4)Common stock -----50 million
Total $100 million
The 6% bond is a callable bond and yield to call (YTC) of this bond is 6.75%. The straight bond which has a coupon rate of 5.5% has a yield of 6.45%. The preference share of John & Son is currently trading at $95. The common stock of John & Son Canada Corp has a beta of 1.25. The T-bill rate is 2% and the return on TSX composite index is 9%. The corporate tax rate is 35%.
i) Compute the cost of capital after tax for each sources of financing (capital)? [6 marks]
ii) What is its WACC?
iii) If John & Son Canada Corp is evaluating an investment proposal that provide internal rate of return (IRR) of 12%, should the company go with the proposal assuming that the WACC ramains constant.
The cost of debt is the effective interest rate a company pays on its debts. It's the cost of debt, such as bonds and loans,... View the full answer