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A company has 5,000,000 shares of stock outstanding at a price of $35 per share. They paid a dividend of $2 and the dividend is expected to grow by 8% per year forever. The stock has a beta of .8, the current risk free rate is 6%, and the market risk premium is 9%. The corporation also has 400,000 bonds outstanding with a price of $925 per bond. The bond has a coupon rate of 6% with semiannual interest payments, a face value of $1,000, and 14 years to go until maturity. The company plans on paying off their debt until they reach their target debt ratio of 60%. They expect their cost of debt to be 6% and their cost of equity to be 10% under this new capital structure. The tax rate is 40%. 1. Using their target capital structure and expected costs of debt and equity, what is their WACC? 2. What should the new price of the bond be given the new cost of debt? 3. What should the new price of the stock be given the new cost of equity? *** Please show steps *** Jan 18 2014 05:38 PM


Solution ID:609218 | This paper was updated on 26-Nov-2015

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