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M&A evaluation

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ABC Incorporated shares are currently trading for $32 per share. The firm has 1.13 billion shares outstanding. In addition, the market value of the firm's outstanding debt is $2 billion. The 10-year Treasury bond rate is 6.25%. ABC has an outstanding credit record and has earned a AAA rating from the major credit-rating agencies. The current interest rate on AAA corporate bonds is 6.45%. The historical risk premium over the risk-free rate of return is 5.5 percentage points. The firm's beta is estimated to be 1.1 and its marginal tax rate, including federal, state, and local taxes, is 40%.
a. What is the cost of equity?
b. What is the after-tax cost of debt?
c. What is the weighted average cost of capital?

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Solution Summary

The expert provides a M and A evaluation for ABC Incorporated.

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Cost of equity = .0625 + 1.1 (.055) = .123
Rf + b( Rm- Rf)

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