A corporation has 12,000,000 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 6% per year forever. The stock has a beta of 1.3, the current risk free rate is 4%, and the market risk premium is 7%. The corporation also has 900,000 bonds outstanding with a price of $950 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 paying off debt until they reach their target debt ratio of 30%. They expect their cost of debt to be 7% and their cost of equity to be 11% under this new capital structure. The tax rate is 40%

1. What is the CAPM required return on the corporation’s stock?

a) 11.3% b) 11.9% c) 12.5% d) 13.1%

2. What is the expected return on the corporation’s stock?

a) 11.3% b) 11.9% c) 12.5% d) 13.1%

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

a) 7.7% b) 8.1% c) 8.6% d) 9.1%

4. What percent of their current market value capital structure is made up of debt?

a) 48% b) 57% c) 64% d) 85%

5. What is their WACC using their target capital structure and expected costs of debt and equity?

a) 7.3% b) 7.8% c) 8.4% d) 9.0%

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

a) $925 b) $1,020 c) $1,085 d) $1,120

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

a) $36.8 b) $42.4 c) $46.5 d) $51.2