Question
1. Consider a bond paying a coupon rate of 10% per year (annual coupon payments) when the yield to maturity is only 8% per year.
1. Consider a bond paying a coupon rate of 10% per year (annual coupon payments) when the yield to maturity is only 8% per year. The bond has ten years to maturity and a face value of $1000. What is the price of this bond?
2. Assume General Motors (GM) has a market value of $6 billion of equity and a market value of $4 billion of debt. GMs cost of equity capital 14% and its debt trades with a yield to maturity of 8.0%. The tax rate is 30%. What is the weighted average cost of capital?
3. L.A. Industries presently pays an annual dividend of $2 per share and it is expected that these dividend payments will continue indefinitely. If L.A. Industries equity cost of capital is 8%, then what is the value of a share of its stock?
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