Consider the following information: Economy Recession Normal Boom Probability of Rate of Return if State Occurs State of Economy Stock A Stock B 20 .035 - 30 .60 115 .20 .20 .190 43 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) % % a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B % 2 Masterson, Inc., has 4.6 million shares of common stock outstanding. The current share price is $90.50, and the book value per share is $11.75. The company also has two bond issues outstanding. The first bond issue has a face value of $83 million, a coupon rate of 5.1 percent, and sells for 96.7 percent of par. The second issue has a face value of $55 million, a coupon rate of 5.5 percent, and sells for 106.9 percent of par. The first issue matures in 21 years, the second in 11 years. The most recent dividend was $4.34 and the dividend growth rate is 5.3 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 23 percent. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % What is the company's aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt % What is the company's weight of equity? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) 2 Equity weight What is the company's weight of debt? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Debt weight What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC % Mc HE Consider the following information: 3 Rate of Return if State Occurs State of Economy Boom Bust Probability of State of Economy .67 Stock A Stock B Stock C .10 .04 .14 -.05 25 33 20 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the variance of a portfolio invested 22 percent each in A and B and 56 percent in C? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g. 32.16161.) a. Expected return b. Variance of portfolio 5 Skipped Information on Lightning Power Co., is shown below. Assume the company's tax rate is 25 percent Debt 17,000 6.1 percent coupon bonds outstanding, $1.000 par value, 27 years to maturity, selling for 106.6 percent of par, the bonds make semiannual payments. Common stock: 560,000 shares outstanding, selling for $82.25 per share; beta is 1.25. Preferred stock 22,500 shares of 4.25 percent preferred stock outstanding, currently selling for $91.50 per share. The par value is $100. Market: 6.6 percent market risk premium and 3.2 percent risk-free rate. What is the company's cost of each form of financing? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g.. 32.16.) Cost of equity Aftertax cost of debt Cost of preferred stock % % % Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC 6 Jiminy's Cricket Farm issued a 30-year, 6.6 percent semiannual bond 6 years ago. The bond currently sells for 108.1 percent of its face value. The book value of this debt issue is $152 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity, the book value of this issue is $99 million, and it sells for 62.5 percent of par. The company's tax rate is 22 percent. What is the total book value of debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g. 1,234,567.) Total book value of debt 251,000,000 What is the total market value of debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Total market value $ 226,187,000 What is the aftertax cost of the 6.6 percent coupon bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 6 Aftertax cost of debt What is the aftertax cost of the zero coupon bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt 1% What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Consider the following information: Economy Recession Normal Boom Probability of Rate of Return if State Occurs State of Economy Stock A Stock B 20 .035 - 30 .60 115 .20 .20 .190 43 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) % % a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B % 2 Masterson, Inc., has 4.6 million shares of common stock outstanding. The current share price is $90.50, and the book value per share is $11.75. The company also has two bond issues outstanding. The first bond issue has a face value of $83 million, a coupon rate of 5.1 percent, and sells for 96.7 percent of par. The second issue has a face value of $55 million, a coupon rate of 5.5 percent, and sells for 106.9 percent of par. The first issue matures in 21 years, the second in 11 years. The most recent dividend was $4.34 and the dividend growth rate is 5.3 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 23 percent. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % What is the company's aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt % What is the company's weight of equity? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) 2 Equity weight What is the company's weight of debt? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Debt weight What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC % Mc HE Consider the following information: 3 Rate of Return if State Occurs State of Economy Boom Bust Probability of State of Economy .67 Stock A Stock B Stock C .10 .04 .14 -.05 25 33 20 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the variance of a portfolio invested 22 percent each in A and B and 56 percent in C? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g. 32.16161.) a. Expected return b. Variance of portfolio 5 Skipped Information on Lightning Power Co., is shown below. Assume the company's tax rate is 25 percent Debt 17,000 6.1 percent coupon bonds outstanding, $1.000 par value, 27 years to maturity, selling for 106.6 percent of par, the bonds make semiannual payments. Common stock: 560,000 shares outstanding, selling for $82.25 per share; beta is 1.25. Preferred stock 22,500 shares of 4.25 percent preferred stock outstanding, currently selling for $91.50 per share. The par value is $100. Market: 6.6 percent market risk premium and 3.2 percent risk-free rate. What is the company's cost of each form of financing? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g.. 32.16.) Cost of equity Aftertax cost of debt Cost of preferred stock % % % Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC 6 Jiminy's Cricket Farm issued a 30-year, 6.6 percent semiannual bond 6 years ago. The bond currently sells for 108.1 percent of its face value. The book value of this debt issue is $152 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity, the book value of this issue is $99 million, and it sells for 62.5 percent of par. The company's tax rate is 22 percent. What is the total book value of debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g. 1,234,567.) Total book value of debt 251,000,000 What is the total market value of debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Total market value $ 226,187,000 What is the aftertax cost of the 6.6 percent coupon bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 6 Aftertax cost of debt What is the aftertax cost of the zero coupon bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt 1% What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)