1. Kelso's Concrete Co. has 50,000 bonds outstanding that are selling at par value.Bonds with similar characteristics are yielding 8%.The company also has 10 million shares of common stock outstanding.The stock sells for $10 a share, will pays a dividend of $1 next year, and grows at 5%.The U.S. Treasury bill is yielding 4% and the return on the market is 8%.Kelso's tax rate is 30%.What is Kelso's weighted average cost of capital?
2. John's Construction Co. sells 80,000 new bonds at par value.These bonds yield 7.5%.The company previously only had funding from 5 million shares of common stock outstanding.The firm's asset beta is 1.1. The shares of stock sell for $40 each.The U.S. Treasury bill is yielding 4% and the market risk premium is 8%.John's tax rate is 35%.What is John's new weighted average cost of capital as a result of the issuance of the debt?(Solution uses M&M II rather than the Hamada.)