use the following info. A corporation has 10,000,000 shares of stock outstanding

Question

use the following info. A corporation has 10,000,000 shares of stock outstanding at a of $60 per share. They just paid a dividend of $3 and the dividend is expected to grow by 6% per year forever. The stock has a beta of 1.2 the current risk free rate is 3% and the market risk premium is 5%. The corpration also has 500,000 bonds oustanding with a price of 1,100 per bond. The bond has a coupon rate of 9% with semiannual interest payments, a face value of 1,000 and 13 years to go until maturity. The company plans on paying off rhe debt until they reach their target debt ratio of 30%. They expect their cost of debt to be 6% and their cost of equity to be 9% under this new capital structure. The tax rate is 40%.

1. what is the required return on corporation's stock?

a. 9% b. 10.6% c. 11.3% d.12.2%

2. what is the expected return on the corporation's stock?

a 9% b 10.6% c 11.3% d 12.2%

3. What is the yield to maturity on the company's debt?

a. 7.25% b 7.75% c 8.25% d 8.75%

4. What % of their current market value capital structure is made up of equity?

a. 35% b 42% c 52% d 60%

5. what is their WACC using their target Capital structure and expected cosr of debt and equity?

a 7.4% b 8.5% c 9.1% D 9.8%

6. Given the new cost of deb, what should be the new price of the bond?

a. $920 b $1060 c $1172 d $1268

7. given the new cost of equity, what should be the new price of the stock?

a. $71 b $82 c $91 d $106

Explanation / Answer

required rate of return = Risk free rate + Beta * market risk premium

= 3% + 1.2 * 5%

= 3% + 6%

= 9%

2) expected rate of return

3/60 + 6%

= 11%

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