Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

11-17 A corporation has 10,000,000 shares of stock outstanding at a price of $60 per share. They just paid a dividend of $3 and the

11-17 A corporation has 10,000,000 shares of stock outstanding at a price of $60 per share. They just paid a dividend of $3 and the dividend is expected to grow by 6% per year forever. The stock has a beta of 1.2, the current risk free rate is 3%, and the market risk premium is 5%. The corporation also has 500,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 9% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on paying off their debt until they reach their target debt ratio of 30%. They expect their cost of debt to be 6% and their cost of equity to be 9% under this new capital structure. The tax rate is 40%

11. What is the required return on the corporations stock?

a) 9% b) 10.6% c) 11.3% d) 12.2%

12. What is the expected return on the corporations stock?

a) 9% b) 10.6% c) 11.3% d) 12.2%

13. What is the yield to maturity on the companys debt?

a) 7.25% b) 7.75% c) 8.25% d) 8.75%

14. What percent of their current market value capital structure is made up of equity?

a) 35% b) 42% c) 52% d) 60%

15. What is their WACC using their target capital structure and expected costs of debt and equity?

a) 7.4% b) 8.5% c) 9.1% d) 9.8%

16. Given the new cost of debt, what should be the new price of the bond?

a) $920 b) $1,060 c) $1,172 d) $1,268

17. Given the new cost of equity, what should be the new price of the stock?

a) $71 b) $82 c) 91 d) $106

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Oxford Handbook Of Quantitative Asset Management

Authors: Bernd Scherer, Kenneth Winston

1st Edition

0199553432, 978-0199553433

More Books

Students also viewed these Finance questions