Question
Use the following information for questions 1-7. A corporation has 9,000,000 shares of stock outstanding at a price of $60 per share. They just paid
Use the following information for questions 1-7. A corporation has 9,000,000 shares of stock outstanding at a price of $60 per share. They just paid a dividend of $3 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 3%, and the market risk premium is 6%. The corporation also has 700,000 bonds outstanding with a price of $1,050 per bond. The bond has a coupon rate of 8% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on paying off debt until they reach their target debt ratio of 40%. They expect their cost of debt to be 7% and their cost of equity to be 10% under this new capital structure. The tax rate is 25%
5. What is their WACC using their target capital structure and expected costs of debt and equity?
a) 7.3% b) 7.8% c) 8.1% d) 9.0%
6. Given the new cost of debt, what should be the new price of the bond?
a) $925 b) $1,020 c) $1,085 d) $1,120
7. Given the new cost of equity, what should be the new price of the stock?
a) $75 b) $86 c) $98 d) $107
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