Question

4. Here’s some info on a company:

Number of issuances           

Debt                                        3000

Preferred stock                       15,000                                  

Equity                                    90,000                                              

Bonds coupon rate: 0%                     Current stock price: $45            Market risk premium: 8%

Bond par value: $1000                       Stock beta:    1.2                      Pref. dividend: $8

Bond time to maturity: 5 years            Preferred stock price: $60         Tax rate: 30%

Bond price: 73% of par                      Risk free rate:    6%  

What is this company’s capital structure weights? What is the WACC?

27. Here’s some info for a bond:
Price = $800 Annual coupon rate: 6% Coupons per year: 2 Par = $1000 YTM: 10%

What are the current yield and required rate of return for this bond?

A. 6% and 8% B. 6% and 10% C. 3.75% and 10% D. 7.5% and 10% E. 3% and 10%

Answer 1

4)

Cost of equity:

As per CAPM cost of equity = risk free rate + beta*(market risk premium)

= 6% + 1.2*(8%)

= 15.60%

cost of preferred stock:

= dividend / price

= 8 / 60

= 13.33%

Cost of debt:

future value = present value*(1+r)^n

where r = YTM

n = number of years

1000 = 730*(1+r)^5

r = (1000/730)^(1/5) - 1

r = cost of debt = 6.50%

after tax cost of debt = 6.50*(1 - 0.3) = 4.55%

WACC = 11.924% (formula = cost * weights)

(capital structure weights are highlighted)

27)

current yield = coupon / current price

= 60 / 800

= 7.5%

required rate of return = ytm = 10%

Option D is correct.