Chelseas rentals recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 15 years, have an 7.50% annual coupon, a par value of $1,000, and a market price of $1,075.00. (2) The companys tax rate is 40%. (3) The risk-free rate is 2.50%, the market risk premium is 6.50%, and the stocks beta is 1.30. (4) The target capital structure consists of 35% debt, 10% preferred stock, and the balance is common equity. (5) The preferred stock currently trades at $50 and has a dividend of $4 per share.

1. What is the cost of debt?

1. 11% b. 6.69% c. 7.6% d. 12.05%

2. What is the cost of preferred stock?

1. 9.27% b. 10.95% c. 8.00% d. 7.05%

3. What is the cost of equity? (use CAPM model to compute)

1. 13.67% b. 10.95% c. 17.64% d. 12.05%

4. What is the WACC?

1. 8.23% b. 10.95% c. 9.00% d. 6.75%

5. Assume that the risk-free rate is 3.5% and the expected return on the market is 9%.

What is the required rate of return on a stock with a beta of 1.2? (CAPM model)

a. 9.55% b. 10.1% c. 13.6% d. 6.05%