Historical Fiction
February 23, 2021
Chamberlain University The Digestion Process discussion
February 23, 2021

  • Read Corporate Finance: Core Principles and Applications, 5th Edition by Ross/Westerfield/Jaffe/Jordan. (Chapter 12).


Risk-free rate 0.016 Market rate 0.078 Tax rate 30%



Common stock

Interest rate




7 yr, B rated bond issue

Shares outstanding


Price per bond


Price per share


Number issued


Use the chart above to answer questions 1-6. Refer to the ratings chart in the slides to find the yield to maturity on the bond issue.

  • What are the weights the bond issue and loans contribute to the company’s overall debt?
  • What is the after-tax weighted average cost of debt?
  • Using the CAPM, what is the required return on the company’s common stock?
  • What is the market value of the firm’s common stock?
  • What are the weights the debt and equity contribute to the company’s capital?
  • What is the weighted average cost of capital?
  • If the firm has a project with an expected return of 5%, should the firm invest in the project? Justify your answer.


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