QUESTION 5 (40 marks) Trump and Biden Corporation has the following securities outstanding: Common stock 50,000 shares of common stock outstanding. The common stock currently sells for $20 per share and has a beta of 1.2. The rate of market return (Rm) is 14% and the risk-free rate (Rf) is 4% Preferred stock 1,000 shares of 5 percent (dividend rate) preferred stock outstanding with $100 par value per share. The preferred stock currently sells for $50 per share. Bonds The company has two types of bonds outstanding: coupon bond (B1) and zero coupon bond (B2). Both bonds have annual compounding. Their bond features are shown below. Bond features Coupon Bonds (B1) Zero Coupon Bonds (B2) Par $1,000 $1,000 Current market price (P0) $865.806 $148.6436 Quantity of bonds 2,000 bonds 10,000 bonds Years to maturity 10 years 20 years Coupon interest rate 6% 0 Compounding period Annual compounding Annual compounding The firm's corporate tax rate is 20 percent.

(a) What are

(1) the market value of common stock (MVE),

(2) the market value preferred stock (MVP),

(3) the market value of coupon bonds (MVB1),

(4) the market value of zero coupon bonds (MVB2),

and (5) the total market value of all securities/capital (MV) of the firm? (10 marks)

(b) What are weights of capital of common stock, preferred stock, coupon bonds, and zero coupon bonds [that is, what are

(1) WE, (2) WP, (3) WB1, and (4) WB2 ]? (8 marks)

(c) What is the cost of common stock, (RE) (required rate of return on common stock)? (4 marks)

(d) What is the cost of preferred stock (RP) (required rate of return on preferred stock)? (4 marks)

[Note: For parts (e) and (f) below, you may use PV and PVA equations or PV and PVA tables to find YTM by trial and error method. However, you are required to show all detailed steps and computations clearly.]

(e)

(1) What is the yield-to-maturity (YTM) of the coupon bonds (B1), that is (YTMB1)?

(2) What is the after-tax cost of debt/bond of B1 (RB1 Aftertax)? (5 marks)

(f) (1) What is the yield-to-maturity (YTM) of the zero coupon bonds (B2), that is (YTMB2)?

(2) What is the after-tax cost of debt/bond of B2 (RB2 Aftertax)? (5 marks)

(g) Based on the above, what is the weighted average cost of capital (WACC) of the firm? (4 marks)