1. The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004:

9.125 May 09 100.09375 100.12500 ... -2.15

Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?

2. Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 35 percent. (Assume that the face value of one coupon bond is $1,000.)

a. What is the pretax cost of debt?

b. What is the aftertax cost of debt?

c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

3. The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? (Assume that the face value of one bond (for both coupon and zero-coupon bonds) is $1,000, and that semi-annual compounding is used for the zero-coupon bond.)

Debt:

Preferred stock: Common stock: Market:

60,000 bonds with a coupon rate of 6 percent and a current price quote of 109.5; the bonds have 20 years to maturity. 230,000 zero coupon bonds with a price quote of 17.5 and 30 years until maturity.

150,000 shares of 4 percent preferred stock with a current price of $79, and a par value of $100.

2,600,000 shares of common stock; the current price is $65, and the beta of the stock is 1.15.

The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.