1. Pfizer Incorporated has 2 million shares of common stock, selling at $18 each. The β of the stock is 1.5, T-bill rate is 6%, and the expected return on the market is 12%. Pfizer also has $20 million (face amount) of bonds, with coupon 6%, which will mature after 8 years. The required rate of return for the bondholders is 10%. Use equation (3.1) to find the market value of the bonds. The income tax rate of Pfizer is 40%. Find the WACC of Pfizer.
2. Merck & Co has the following capital structure. It has 5 million shares of common stock that sell at $26 each. The stock just paid its annual dividend of $1.75, and it is expected to grow at annual rate of 7% in the foreseeable future. The company also has $150 million (face amount) in zero-coupon bonds that will mature after 8 years, and they sell at $500 for each $1,000 bond. Use equation (2.1) to find the cost of zero-coupon debt. The income tax rate of Merck is 30%. Find its weighted average cost of capital.
3. Monsanto Company has 3 million shares, selling at $25 each. The company has just paid a dividend of $1.35 and the next year's dividend is expected to be $1.50, which is in line with its long-term growth rate. Monsanto has $50 million (face amount) of bonds, maturing in 10 years, with coupon 8%. The yield to maturity for the bonds is 10%. (Use the definition of yield to maturity on page 36 of the textbook.) The income tax rate of the company is 30%. Find its WACC.
4. Verizon Co has 4 million shares of common stock selling at $45 each. It has $70 million (face value) of bonds, coupon 6%, maturing in 5 years, and selling at 90. The difference between the cost of debt and the cost of equity for Verizon is estimated to be 6%. The tax rate of Verizon is 30%. The firm also has 2 million shares of preferred stock that pay annual dividends of $5 each. The preferred shareholders get a return that is 2% less than the return of the common shareholders. Find the WACC of Verizon.
5. Comcast Corporation has the following capital structure: $40 million face amount of 4% bonds due in 10 years, selling at 60; 4 million shares of common stock selling at $16 each; and 1 million shares of preferred stock selling at $15 a share. The beta of Comcast is 1.35, the riskless rate is 6%, and the expected return on the market is 12%. The tax rate of Comcast is 30%, and the cost of capital for the preferred stock is exactly halfway between that of debt and equity. Find the WACC of Comcast.
6.AT&T has the following capital structure: $56 million (face value) of bonds with coupon of 9%, maturing after 11 years, selling at 79; $40 million, 12% coupon bonds, selling at par; 36 million shares of common selling at $6 each; and 1 million shares of preferred stock which pays a dividend of $2.50 and sells at $17 each. The β of the common stock is 1.24, the expected return of the market is 16%, and the riskless rate is 9%. The tax rate of AT&T is 25%. Find the WACC of AT&T.
7. Exelon Corporation has tax rate of 35%. It may raise new capital in one of the following three ways. Find the after-tax cost of new capital.
(A) It can sell common stock at $45 a share, which will pay a dividend of $4 next year. The expected rate of growth of dividends is 5% per annum forever.
(B) It can sell 8% bonds at 90 that will mature in 10 years.
(C) By selling $8 preferred stock at $75 a share, redeemable at par after 5 years
8. Alcoa Company plans to issue discount bonds with a market value equal to 30% of their face value. The bonds will carry 6% coupon, paying interest semiannually, and they will mature after 10 years. The income tax rate of Alcoa is 40%.
(A) Calculate the approximate yield-to-maturity of the bonds, and then the after-tax cost of debt for Alcoa.
(B) Using the concept of original issue discount, write an equation that would give the after-tax cost of debt for Alcoa. Solve this equation by using Wolfram Alpha or Excel.