Use the following information for questions 1-7. A corporation has 11,000,000 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 4% per year forever. The stock has a beta of .8, the current risk free rate is 3%, and the market risk premium is 6%. The corporation also has 200,000 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 60%. 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) 6.2%                       b) 6.9%                        c) 7.8%                        d) 9.2%

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

a) 6.2%                        b) 6.9%                        c) 7.8%                        d) 9.2%

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

     a) 5.9%                   b) 6.3%            c) 6.8%             d) 7.3%

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

     a) 24%                    b) 35%                         c) 44%                          d) 68%

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

     a) 7.3%                   b) 7.8%            c) 8.4%             d) 9.2%

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

     a) $920                    b) $1,060                      c) $1,137                      d) $1,239

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

   a) $30                       b) $37                           c) $44                           d) $52