What should be the new price of the bond

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Reference no: EM132040159

Problem

Use the following information for questions . A corporation has 9,000,000 shares of stock outstanding at a price of $50 per share.

They just paid a dividend of $2 and the dividend is expected to grow by 7% per year forever.

The stock has a beta of 1.2, the current risk free rate is 5%, and the market risk premium is 6%. The corporation also has 300,000 bonds outstanding with a price of $1,100 per bond.

The bond has a coupon rate of 11% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on reducing their level of debt until they reach their target debt ratio of 30%.

They expect their cost of debt to be 8% and their cost of equity to be 11% under this new capital structure. The tax rate is 40%

1. What percent of their current market value capital structure is made up of debt?

a) 35% b) 42% c) 55% d) 58%

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

a) 7.7% b) 8.7% c) 9.1% d) 9.8%

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

a) $1,053 b) $1,127 c) $1,172 d) $1,239

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

a) $36.75 b) $47.25 c) $53.50 d) $56.67

Reference no: EM132040159

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