A corporation has 6,000,000 shares of stock outstanding at a price of $70 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 .8, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 400,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 7% 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 8% and their cost of equity to be 12% under this new capital structure. The tax rate is 40%
1. What is the required return on the corporation's stock?
2. What is the expected return on the corporation's stock?
3. What is the yield to maturity on the company's debt?