A corporation has 9,000,000 shares of stock outstanding at a price of $40 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 .9, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 300,000 bonds outstanding with a price of $1,100 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 adding debt until they reach their target debt ratio of 70%. They expect their cost of debt to be 9% and their cost of equity to be 14% under this new capital structure. The tax rate is 25%
1. What is the required return on the corporation’s stock?
a) 9.4% b) 10.25% c) 11.3% d) 12.2%
2. What is the expected return on the corporation’s stock?
a) 9.4% b) 10.25% c) 11.3% d) 12.2%
3. What is the yield to maturity on the company’s debt?
a) 6.2% b) 6.5% c) 6.8% d) 7.1%