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Question Droz’s Hiking Gear Company has found that its common equity shares have a beta equal to 1.50 while the risk-free return is 12 percent and the market risk premium is 6 percent. It has 10-year bonds outstanding with a market price of $1,000, a face value of $1,000, and an annual coupon rate of 15 percent. The total market value (debt plus equity) of the firm is $20,000,000. What is the market value of the firm’s debt if the firm’s WACC is 18 percent and the firm is subject to a 40 percent marginal tax rate?

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Question

Droz’s Hiking Gear Company has found that its common equity shares have a beta equal to 1.50 while the risk-free

return is 12 percent and the market risk premium is 6 percent. It has 10-year bonds outstanding with a market price of $1,000, a face value of $1,000, and an annual coupon rate of 15 percent.  The total market value (debt plus equity) of the firm is $20,000,000.  What is the market value of the firm’s debt if the firm’s WACC is 18 percent and the firm is subject to a 40 percent marginal tax rate?

 
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