Question

Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation....

  1. Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation.

                                                -A.B.C.D.E.

Target capital structure: 47% debt, 8% preferred stock and 45% common equity. Yield to maturity on bonds: 8.0%; Preferred stock dividend: $6.40 per year; current market price of preferred stock is $68.90. CAPM data for common equity: risk-free rate is 3.0%; market risk premium for the average stock is 8.0%; ABC has a beta of 1.13. ABC's marginal tax rate is 40%.

                                                -A.B.C.D.E.

Target capital structure: 51% debt, 5% preferred stock and 44% common equity. Yield to maturity on bonds: 5.2%; Preferred stock dividend: $7.04 per year; current market price of preferred stock is $69.54. CAPM data for common equity: risk-free rate is 4.9%; market risk premium for the average stock is 6.3%; ABC has a beta of 1.32. ABC's marginal tax rate is 40%.

                                                -A.B.C.D.E.

Target capital structure: 51% debt, 8% preferred stock and 41% common equity. Yield to maturity on bonds: 7.0%; Preferred stock dividend: $6.97 per year; current market price of preferred stock is $69.47. CAPM data for common equity: risk-free rate is 4.0%; market risk premium for the average stock is 4.1%; ABC has a beta of 2.22. ABC's marginal tax rate is 40%.

                                                -A.B.C.D.E.

Target capital structure: 52% debt, 6% preferred stock and 42% common equity. Yield to maturity on bonds: 7.1%; Preferred stock dividend: $7.22 per year; current market price of preferred stock is $69.72. CAPM data for common equity: risk-free rate is 3.9%; market risk premium for the average stock is 7.6%; ABC has a beta of 1.26. ABC's marginal tax rate is 40%.

                                                -A.B.C.D.E.

Target capital structure: 38% debt, 6% preferred stock and 56% common equity. Yield to maturity on bonds: 4.3%; Preferred stock dividend: $7.27 per year; current market price of preferred stock is $69.77. CAPM data for common equity: risk-free rate is 4.9%; market risk premium for the average stock is 9.7%; ABC has a beta of 0.89. ABC's marginal tax rate is 40%.

A.

8.32%

B.

9.18%

C.

7.91%

D.

8.50%

E.

8.42%
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