Question

1) For the following company, what is the correct weight of the company's common stock? Preferred...

1) For the following company, what is the correct weight of the company's common stock? Preferred stock $350 million, Bonds $400 million, Common $685 million.

Question 1 options:

A)

25%

B)

28%

C)

24%

D)

48%

2) What is the cost of the following preferred stock? Price $32.55 per share. Dividend $4.11 per share.

Question 2 options:

A)

13%

B)

7.22%

C)

9%

D)

8%

3) What is the cost of the following common stock? Price $44.82 per share. Dividend $1.56 per share. Expected growth rate 6% per year.

Question 3 options:

A)

6%

B)

3%

C)

9%

D)

12%

4) What is the cost of the following bond? Maturity 20 years, Face value $1,000, coupon 8%, Yield 9%, tax rate 22%

Question 4 options:

A)

9%

B)

8%

C)

Cannot calculate without further information

D)

7%

5) Calculate the WACC for the following: Bonds $100 million (with a cost of 8%), common $200 million (with a cost of 6%), Preferred $50 million (with a cost of 9%).

Question 5 options:

A)

8.43%

B)

9.65%

C)

7.00%

D)

10.29%

Homework Answers

Answer #1

1)

Correct option is > D) 48%

Weight of common stock = Common stock / (Common stock + Preferred stock + Debt)

= 685/(685+350+400)

= 48%

2)

Correct option is > A) 13%

Cost of preferred stock

= Dividend / Price

= 4.11/32.55

3)

Correct option is > C) 9%

Cost of common stock = (Dividend / Stock price) + Growth rate

Cost of common stock = (1.56/44.82) + 6%

Cost of common stock = 9%

4)

Correct option is > D) 7%

Cost of debt = Yield x (1-Tax)

= 9% x (1-22%)

= 7%

5)

Correct option is > = 6% x 57.14% + 9% x 14.29% + 8% x 28.57%

WACC = Cost of equity x Weight of equity + Cost of preferred x Weight of preferred + Cost of debt x Weight of debt

Particular

Amt

Weight

Debt

100

28.57%

Equity

200

57.14%

Preferred

50

14.29%

Total

350

WACC = 6% x 57.14% + 9% x 14.29% + 8% x 28.57%

WACC = 7%

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