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 percent of their current market value capital structure is made up of debt?
a) 33% b) 48% c) 58% d) 69%
2. What is their WACC using their target capital structure and expected costs of debt and equity?
a) 7.7% b) 8.9% c) 9.4% d) 10.2%
3. Given the new cost of debt, what should be the new price of the bond?
a) $925 b) $960 c) $1,025 d) $1,175
4. Given the new cost of equity, what should be the new price of the stock?
a) $23.33 b) $27.25 c) $33.50 d) $36.67