Use the following information for questions 1-7. A corporation has 9,000,000 shares of stock outstanding at a price of $30 per share. They just paid a dividend of $2 and the dividend is expected to grow by 5% per year forever. The stock has a beta of 1.1, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 600,000 bonds outstanding with a price of $900 per bond. The bond has a coupon rate of 8% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on paying off debt until they reach their target debt ratio of 40%. They expect their cost of debt to be 7% and their cost of equity to be 10% under this new capital structure. The tax rate is 25%
1. What is the CAPM required return on the corporation’s stock?
a) 9.8% b) 10.6% c) 11.3% d) 12%
2. What is the expected return on the corporation’s stock?
a) 9.8% b) 10.6% c) 11.3% d) 12%
3. What is the yield to maturity on the company’s debt?
a) 8.4% b) 8.9% c) 9.3% d) 9.7%
4. What percent of their current market value capital structure is made up of debt?
a) 42% b) 54% c) 67% d) 81%
5. What is their WACC using their target capital structure and expected costs of debt and equity?
a) 7% b) 7.8% c) 8.1% d) 9.1%
6. Given the new cost of debt, what should be the new price of the bond?
a) $971 b) $1,032 c) $1,056 d) $1,084
7. Given the new cost of equity, what should be the new price of the stock?
a) $36 b) $42 c) $48 d) $54