Reference no: EM133030787
Questions -
Q1- The Saunders Investment Bank has the following financing outstanding. Debt: Preferred stock: 45,000 bonds with a coupon rate of 5 percent and a current price quote of 105.1; the bonds have 14 years to maturity and a par value of $1,000. 15,900 zero coupon bonds with a price quote of 24.3, 29 years until maturity, and a par value of $10,000. Both bonds have semiannual compounding.
140,000 shares of 3.5 percent preferred stock with a current price of $88 and a par value of $100.
Common stock:2,000,000 shares of common stock; the current price is $77 and the beta of the stock is 1.05.
Market: The corporate tax rate is 25 percent, the market risk premium is 7 percent, and the risk-free rate is 3.5 percent.
What is the WACC for the company?
Q2-Hero Manufacturing has 7.5 million shares of common stock outstanding. The current share price is $87 and the book value per share is $4. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, a coupon rate of 6.3 percent and sells for 106.5 percent of par. The second issue has a face value of $50.5 million, a coupon rate of 6.8 percent and sells for 110.3 percent of par. The first issue matures in 8 years, the second in 24 years.
Suppose the company's stock has a beta of 1.2. The risk-free rate is 2.8 percent and the market risk premium is 6.7 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 22 percent. What is the company's WACC?
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