A corporation has 9,000,000 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 7% per year forever. The stock has a beta of 1.2, the current risk free rate is 5%, and the market risk premium is 6%. The corporation also has 300,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 11% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on reducing their level of debt until they reach their target debt ratio of 30%. They expect their cost of debt to be 8% and their cost of equity to be 11% under this new capital structure. The tax rate is 40%

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

a) 9.4%          b) 10.6%         c) 11.3%         d) 12.2%       

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

a) 9.4%                       b) 10.6%         c) 11.3%         d) 12.2%       

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

a) 9.2%      b) 9.4%                        c) 9.6%                        d) 9.8%

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

a) 35%       b) 42%             c) 55%             d) 58%

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

a) 7.7%      b) 8.7%                        c) 9.1%                        d) 9.8%

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

a) $1,053               b) $1,127                     c) $1,172         d) $1,239

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

a) $36.75   b) $47.25         c) $53.50         d) $56.67