QUESTION 2 (24 marks) (a) Jack is analyzing the following two bonds with the same risk for investment: Bond A: A 20-year $1,000-par 6% quarterly coupon bond issued by Company A Bond B: A 30-year zero coupon bond issued by Company B (i) Determine the market price of Bond A given its current YTM (APR) is 8%. (4 marks) (ii) Suppose Bond A's YTM (APR) drops by 2% one year later. 1) Compute the current yield and capital gains yield of Jack's investment in Bond A. (6 marks) 2) Compute the 1-year total yield of Jack's investment in Bond A assuming the YTM remains unchanged (at 6% APR) until t-4 (quarters). (5 marks) (iii) If Jack expects the interest rate to drop in the coming year, which bond (Bond A or Bond B) should Jack choose? Explain. (2 marks) (b) The costs of common stock, preferred stock and debt of UWRL Inc. are 18%, 6.5% and 8% respectively. Assume that the firm's (targeted/optimal) capital structure is 50% common stock, 5% preferred stock and 45% debt. The relevant corporate income tax rate is 35%. (i) Compute UWRL's WACC. (4 marks) (ii) In terms of the risks faced by investors, debt should carry a lower risk than that of preferred shares. Provide a possible explanation for the difference between the two costs stated above. Support your answer with calculation. (3 marks) E ffe 31/5 usid rojeof stron 3