Question
Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation. Target capital structure: 31% debt, 9% preferred stock and
Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation. Target capital structure: 31% debt, 9% preferred stock and 60% common equity. Yield to maturity on bonds: 9.0%; Preferred stock dividend: $6.11 per year; current market price of preferred stock is $68.61. CAPM data for common equity: risk-free rate is 3.3%; market risk premium for the average stock is 4.1%; ABC has a beta of 2.02. ABC's marginal tax rate is 40%. Target capital structure: 65% debt, 9% preferred stock and 26% common equity. Yield to maturity on bonds: 8.1%; Preferred stock dividend: $7.87 per year; current market price of preferred stock is $70.37. CAPM data for common equity: risk-free rate is 3.0%; market risk premium for the average stock is 21.4%; ABC has a beta of 0.54. ABC's marginal tax rate is 40%. Target capital structure: 48% debt, 8% preferred stock and 44% common equity. Yield to maturity on bonds: 7.6%; Preferred stock dividend: $6.70 per year; current market price of preferred stock is $69.20. CAPM data for common equity: risk-free rate is 3.2%; market risk premium for the average stock is 4.7%; ABC has a beta of 2.01. ABC's marginal tax rate is 40%. Target capital structure: 51% debt, 11% preferred stock and 38% common equity. Yield to maturity on bonds: 7.7%; Preferred stock dividend: $7.23 per year; current market price of preferred stock is $69.73. CAPM data for common equity: risk-free rate is 4.6%; market risk premium for the average stock is 7.3%; ABC has a beta of 1.22. ABC's marginal tax rate is 40%. Target capital structure: 34% debt, 6% preferred stock and 60% common equity. Yield to maturity on bonds: 5.2%; Preferred stock dividend: $6.53 per year; current market price of preferred stock is $69.03. CAPM data for common equity: risk-free rate is 4.1%; market risk premium for the average stock is 5.0%; ABC has a beta of 1.65. ABC's marginal tax rate is 40%. A. 8.53% B. 9.42% C. 9.04% D. 7.95% E. 8.63%
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