a) Computation of Total market value of common stocks:

Total market value of common stocks = Number of shares of common stock outstanding*Market Price per Share

=10,000,000*$15

= $150,000,000

 

b) Computation of Total market value of bonds:

Total market value of bonds = Number of Bond Outstanding * Selling price of Bonds 

= 80,000*$1,020

= $81,600,000

 

c) Computation of Cost of Equity:

Cost of Equity = Risk-free Rate + Beta*Market Risk Premium

=4%+1.9*(10%-4%)

=4%+1.9*6%

Cost of Equity = 15.40%

 

d) Computation of Cost of Debt using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)*2

Here,

Rate = Cost of Debt = ?

Nper = 15 Years * 2 = 30 Periods 

PMT = $1,000*9%/2 = $45

PV = $1,020

FV = $1,000

Substituting the values in formula:

=rate(30,45,-1020,1000)*2 

Rate or Cost of Debt = 8.76%

After Tax Cost of Debt = 8.76%*(1-30%) = 6.13%

 

e) Computation of Cost of capital for the firm:

WACC = (After Tax Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)

Here,

Total Market Value = 150,000,000 + 81,600,000 = 231,600,000

Weight of Equity = 150,000,000 / 231600000 = 0.6477

Weight of Debt = 81600000 / 231600000 = 0.3523

 

WACC = (6.13%*0.3523) + (15.40%*0.6477) = 2.16% + 9.97% = 12.13%