Question

In questions 15 to 17 suppose ABC Corporation has a capital structure consisting of 60% common equity, 10% preferred stock, and 30% debt. Assume tax rate=28%. Assume the expected rate of return for debt is 6%. Also assume the preferred stock price=$25.6, and the preferred dividend=$1. What is Kps, the expected rate of return for preferred stock?

A. 3.4%

B. 3.9%

C. 4.3%

D. 5%

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Question 16 of 17

1 Points

Assume Beta for ABC Corp. is 0.9. If the risk free rate=3% and Km, the return on Market basket is 8%, what is Ke, the expected rate of return on common equity?

A. 5.4%

B. 6%

C. 7.4%

D. 9.2%

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Question 17 of 17

1 Points

What is WACC for ABC Corp.?

A. 5.4%

B. 5.8%

C. 6.1%

D. 6.5%

Answer 1

15) calculation of expected rate of return on preferred stock:

Expected rate of return= preference dividend/ price

=1/25.60= 0.039

So correct answer is B) 3.9%

16) calculation of expected rate of return on equity:

Expected rate of return on equity= risk free rate+ beta*(market return- risk free rate)

= 3+ 0.9(8-3) = 3+ 4.5= 7.5

So correct answer is C) 7.4%

16) Calculation of WACC

Cost of debt= 6*(1-0.28) = 6*0.72 = 4.32%

WACC= cost of debt*weight of debt+ cost of equity*weight of equity+ cost of preferred stock*weight of preferred stock

= (4.32*0.3)+(7.4*0.6)+(3.9*0.10)

=1.296+4.44+0.39= 6.126

So correct answer is C) 6.1%