Required return on the corporation stock


Problem:

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%

Required:

Question 1: What is the required return on the corporation's stock?

Question 2: What is the expected return on the corporation's stock?

Question 3: What is the yield to maturity on the company's debt?

Question 4: What percent of their current market value capital structure is made up of debt?

Question 5: What is their WACC using their target capital structure and expected costs of debt and equity?

Question 5: Given the new cost of debt, what should be the new price of the bond?

Question 6: Given the new cost of equity, what should be the new price of the stock?

Please explain in detail and provide all workings.

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Finance Basics: Required return on the corporation stock
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