1. A company is planning an expansion that will be financed with the amounts below. Assuming a 40% tax rate what after tax rate of return must the company earn on its investments?
• After tax WACC?
Type of Capital/ Amounts to be raised/ Required return before tax
Bond /756000/ 7.50%
Preferred Stock/ 430000/ 11%
Common Stock/ 656400/ 15%
2. You have been given the following facts and assumptions concerning ABC Corp. at December 31, 2013. Yield to maturity on long term government bond is 5.00%. Yield to maturity on company long term government bond is 7.0%.Coupon rate on company long term bond is 7.0%.Market price of risk is 8.0% along with estimated company beta value of 1.5.Stock is selling for $40 in the market and 250 million shares are outstanding. Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million. Existing tax rate stands at 35%.Given all the information estimate the ABC Corp's weighted average cost of capital.
6.46% 6.58% 11.27% 15.61%