1. IBM ended trading on 7/18/2017 with a stock price of $154.00, and it’s most recent year of dividend payments was $6.00 per share. If dividend payments are expected to grow at a constant annual rate of 5% following last year’s dividend of $6.00, what is the expected annual return of an investment in this stock at today’s price? (NOTE: this is the company cost of common equity capital)
2. IBM currently has one bond in the Liabilities section of its Balance Sheet. This 10-year bond with 6 years to maturity and a 5.5% coupon paying semi-annually, has a yield to maturity (NOTE: the cost of this form of debt capital for IBM) of 4.25%. What is the current price of the bond if par value is $1,000?
3. Using the previous two questions, calculate the WACC for IBM assuming common equity and the 10-year bond are the only two forms of capital. Further, assume the relevant tax rate is 25%, the market value of common equity is $135B and the market value of debt is $75B.