A firm has the following capital

Debt: 60,000 7 percent coupon bonds outstanding, 20 years to maturity,

selling for 98 percent of par; the bonds have a JPY 1,000 par value

each and make semiannual payments.

Preferred stock: 20,000 shares of 6 percent preferred stock outstanding,

selling for JPY 98 per share.

Common stock: 1,000,000 shares outstanding, selling for JPY 130 per share,

the beta is 1.30.

Market: 6.5 percent expected market risk premium; 3 percent risk-free rate.

Retail industry WACC = 12%; IT industry WACC = 8%; Banking industry WACC = 10%

[a] Estimate the firm's WACC!

[b] The firm is planning to expand its business into financial services. Explain how this expansion analysis might be affected by your answer in [a]! (2 points)

[c] Hayabusa-san, CFA, is a Japanese investor living in Tokyo. He owns JPY 1,800,000 worth of stock in Niku Inc. Niku Inc. is a Japanese firm located in Osaka. The firm currently has an all-equity capital structure and is considering a capital structure with 30 percent debt. There are currently 1,000,000 Niku Inc.s shares outstanding at a price per share of JPY 90. EBIT is expected to remain constant at JPY 6,000,000. The interest rate on new debt is 7 percent, and there are no taxes. Compare Hayabusa-san's cash flow if the firm has a 100 percent payout and if the firm implements the new capital structure (assuming that he keeps all of his shares)

[d] Mrs. Miki, CFA, is a Japanese financial analyst living in Tokyo. She is currently evaluating the dividend policy of Kagome Inc. The firm is considering whether it shall provide an extra dividend or do a share repurchase. In either case, JPY 10,000,000 would be spent. Mrs. Miki documents that the firm's current earnings are JPY 3,500 per share, the firm's stock currently sells for JPY 93 per share, and there are 8,000 outstanding shares. There are no taxes and other imperfections. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth!