1-A

Consider the following information for Watson Power Co.:

Debt:		5,000 9 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock:		105,000 shares outstanding, selling for $63 per share; the beta is 1.07.
Preferred stock:		14,500 shares of 8 percent preferred stock outstanding, currently selling for $106 per share.
Market:		11 percent market risk premium and 7.5 percent risk-free rate.

Assume the company's tax rate is 31 percent.

Find the WACC.

Multiple Choice

• 13.18%

• 13.82%

• 12.68%

• 12.92%

• 12.78%

1-B

Fama's Llamas has a weighted average cost of capital of 12 percent. The company's cost of equity is 18 percent, and its pretax cost of debt is 8 percent. The tax rate is 32 percent. What is the company's target debt-equity ratio?

Multiple Choice

• 0.8689

• 0.9512

• 1.5

• 0.9604

• 0.9146