Use the following information for questions. 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%

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

a) 7.9%                     b) 8.4%                     c) 8.9%                      d) 9.2%

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

a) 7.9%                      b) 8.4%                     c) 8.9%                      d) 9.2%

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

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

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

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

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%

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

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