Use the following information for Questions 1 - 5.

You have been asked to calculate a firms WACC (weighted average cost of capital). The information you have gathered so far includes:

• The firms ROE is 10% and its Payout Ratio is 50%
• The firm has 10 million shares outstanding, each of which trades at a price of $10. The firm expects to pay a dividend of $1.00 at the end of the year.
• The firm has outstanding debt with a face value of $50 million. These are all 20-year bonds with a 6% coupon (paid semi-annually) and they are selling at a price of $1,273.55 per $1,000 bond.
• The yield on Treasury bills is 3%.
• The return on the market is 9%.
• The firms beta is 2.
• The firms tax rate is 30%.

What is the firms growth rate, calculated using ROE and the Payout Ratio?

A) 3% B) 4% C) 2% D) 5%

What is the firms pre-tax cost of debt?

A) 2% B) 6% C) 8% D) 4%

What proportion of the firms capital structure is comprised of debt?

A) 44.6% B) 38.9% C) 48.8% D) 35.2%

What is the firms cost of equity using both CAPM and the Dividend Discount Model?

• CAPM 15%; Dividend Discount Model 13%

• CAPM 15%; Dividend Discount Model 15%

• CAPM 15%; Dividend Discount Model 12%

• CAPM 15%; Dividend Discount Model 14%

What is the firms WACC (using the CAPM for the cost of equity)?

• 10.25%

• 11.88%

• 12.50%

• 9.40%