Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions): Assets Liabilities Fixed assets $4,000 Debt...

Plastico, a manufacturer of consumer plastic products, is evaluating its capital
structure. The balance sheet of the company is as follows (in millions):
Assets Liabilities
Fixed assets $4,000 Debt $2,500
Current assets $1,000 Equity $2,500
In addition, you are provided the following information:
• The debt is in the form of long-term bonds, with a coupon rate of 10%. The bonds
are currently rated AA and are selling at a yield of 12% (the market value of the bonds is
80% of the face value).
• The firm currently has 50 million shares outstanding, and the current market price
is $80 per share. The firm pays a dividend of $4 per share and has a price/earnings ratio
of 10.
• The stock currently has a beta of 1.2. The riskfree rate is 8%.
• The tax rate for this firm is 40%.
a. What is the debt/equity ratio for this firm in book value terms? In market value
terms?
b. What is the debt/(debt + equity) ratio for this firm in book value terms? In market
value terms?
c. What is the firm’s after-tax cost of debt?
d. What is the firm’s cost of equity?
e. What is the firm’s current cost of capital?