QUESTION 1Suppose a company will issue new 5-year debt with a face value of $1,000 and a coupon rate of 8 percent, paid annually. If the issuing price is $1080 and the tax rate is 40 percent. What is the after-tax cost of debt? If the expected rate of return of the company’s common stock is 18 percent and the company’s target capital structure is 3:7. What is the firm’s WACC?
QUESTION 2In 2009 the earning per share of SOUAET Ltd was $1.5. The company was considering a stock dividend of 10 to 10 shares. On the day of record, the market price of its shares was $30. The comments of a financial analyst are: “P/E ratio of SOUAET is 20 based on the current stock price. After the stock dividend payment, the stock price will decrease to $10 and P/E ratio will decrease to 10 as well. Thus SOUAET is more valuable for investment. Please state the financial analyst’s comments on P/E ratio is correct or not and provide the reasons.