A corporation has 6,000,000 shares of stock outstanding at a price of $70 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 .8, the current risk free rate is 4%, 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 paying off their 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 12% under this new capital structure. The tax rate is 40%

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

a) 8%             b) 8.8%                       c) 9.3%                       d) 10.2%

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

a) 8%             b) 8.8%                       c) 9.3%                       d) 10.2%

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

a) 5.4%                       b) 5.9%                       c) 6.3%                       d) 7.2%

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

     a) 42%                   b) 48%                         c) 64%                         d) 86%

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

     a) 7%                     b) 7.8%                        c) 8.3%                        d) 9.1%

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

    a) $920                   b) $1,060                     c) $1,172                     d) $1,239

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

     a) $30                    b) $40             c) $50              d) $60