Use the following information for questions 12-18. A corporation has 8,000,000 shares of stock outstanding at a price of $50 per share. They just paid a dividend of $2 and the dividend is expected to grow by 7% per year forever. The stock has a beta of 1.2, the current risk free rate is 5%, and the market risk premium is 6%. The corporation also has 500,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 11% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on adding debt until they reach their target debt ratio of 70%. They expect their cost of debt to be 10% and their cost of equity to be 15% under this new capital structure. The tax rate is 40%

12. What is the required return on the corporations stock?

a) 9.4% b) 10.6% c) 11.3% d) 12.2%

13. What is the expected return on the corporations stock?

a) 9.4% b) 10.6% c) 11.3% d) 12.2%

14. What is the yield to maturity on the companys debt?

a) 9.2% b) 9.4% c) 9.6% d) 9.8%

15. What percent of their current market value capital structure is made up of debt?

a) 35% b) 42% c) 55% d) 58%

16. What is their WACC using their target capital structure and expected costs of debt and equity?

a) 7.7% b) 8.7% c) 9.1% d) 9.8%

17. Given the new cost of debt, what should be the new price of the bond?

a) $920 b) $960 c) $1,072 d) $1,172

18. Given the new cost of equity, what should be the new price of the stock?

a) $26.75 b) $37.25 c) $43.50 d) $56.67