A corporation has 20,000,000 shares of stock outstanding at a price of $50 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 3%, and the market risk premium is 6%. The corporation also has 400,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 7% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on issuing debt until they reach their target debt ratio of 70%. They expect their cost of debt to be 8% and their cost of equity to be 13% under this new capital structure. The tax rate is 40%

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

   a) 5.9%                 b) 6.15%                     c) 6.4%                       d) 6.75%

2. What percent of their current market value capital structure is made up of equity?

   a) 35%                  b) 44%                        c) 58%                        d) 70%

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

   a) 7.25%               b) 7.5%                       c) 7.85%                     d) 8.1%

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

  a) $920                 b) $1,060                    c) $1,172                    d) $1,268

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

  a) $21.75             b) $26.25                   c) $31             d) $37.50