Q-1:

What is the cost of debt for a firm that issued 4 years maturity bonds with the following

features (assuming that this is the only debt the firm has):

- Coupon rate: 5% .

- The coupons are paid yearly.

- The par value (face value) is 1000 $

- The bonds are actually traded at 1016.12 $

Note: The cost of debt it is somewhere between 3% and 6%.

Q-2:

A corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 4 years to

maturity, with a current quote of 1111 $.

The firm contracted a loan of 10 M$ with an annual interest rate of 2.5%.

The company's 250,000 shares of preferred stock pay a $4 annual dividend, and sell for

$60 per share.

The company's 400,000 shares of common stock sell for $25 per share and have a beta of

1.5. The risk free rate is 4%, and the market premium is 12%.

Assuming a 35% tax rate, what is the company's WACC?

Q-3:

In class, we used the general analytical expression of the weighted average cost of

capital (WACC) as follows:

WACC = WE.RE + WD.RD

Where WE is the weight of equity; WD is the weight of debt; RE is the cost of equity; RD is

the cost of debt.

1. Show that: WACC = RD + WE ( RE-RD)

2. If RE > RD, what is the capital structure (the weights) that minimizes the WACC?

3. Now, let's assume that we are in the banking sector and that the regulator requires

banks to hold 5% of their assets as equity. Considering regulatory requirements, what

the capital structure that minimizes the WACC in the banking sector?

4. What would be your answers to questions 2 and 3 if RE < RD?