Problem:

A company has 5,000,000 shares of stock outstanding at a price of $35 per share. They paid a dividend of $2 and the dividend is expected to grow by 8% per year forever. The stock has a beta of .8, the current risk free rate is 6%, and the market risk premium is 9%. The corporation also has 400,000 bonds outstanding with a price of $925 per bond. The bond has a coupon rate of 6% with semiannual interest payments, a face value of $1,000, and 14 years to go until maturity. The company plans on paying off their debt until they reach their target debt ratio of 60%. They expect their cost of debt to be 6% and their cost of equity to be 10% under this new capital structure. The tax rate is 40%.

Required:

Question 1: Using their target capital structure and expected costs of debt and equity, what is their WACC?

Question 2: What should the new price of the bond be given the new cost of debt?

Question 3: What should the new price of the stock be given the new cost of equity?

Note: Please show basic calculation.