Target capital structure-expected costs of debt and equity

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Reference no: EM131882511

A corporation has 6,000,000 shares of stock outstanding at a price of $70 per share. They just paid a dividend of $2 and the dividend is expected to grow by 5% per year forever. The stock has a beta of .8, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 400,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 7% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on paying off their debt until they reach their target debt ratio of 70%. They expect their cost of debt to be 8% and their cost of equity to be 12% under this new capital structure. The tax rate is 40%

1. What is their WACC using their target capital structure and expected costs of debt and equity?

a) 7% b) 7.8% c) 8.3% d) 9.1%

2. Given the new cost of debt, what should be the new price of the bond?

a) $920 b) $1,060 c) $1,172 d) $1,239

3. Given the new cost of equity, what should be the new price of the stock?

a) $30 b) $40 c) $50 d) $60

Reference no: EM131882511

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