1. Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 35 percent.
Debt: 10,000 6.4 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.
Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15.
Preferred stock: 35,000 shares of 3.5 percent preferred stock outstanding, currently selling for $72 per share. Market: 7 percent market risk premium and 3.2 percent risk-free rate.
2. A firm has an ROE of 25% and a market-to-book ratio of 2.70. Its P/E ratio is _________.
9.26
10.80
67.50
22.30