Use the following information for questions 1-7. A company has 6,000,000 shares
ID: 2628123 • Letter: U
Question
Use the following information for questions 1-7. A company has 6,000,000 shares of stock outstanding with a price of $40 per share. The firm just paid a dividend of $2 and the dividend is expected to grow at a constant rate of 7% forever. The stock has a beta of 1.2, the risk free rate is 4% and the Market Risk Premium is 8%. The firm also has 120,000 bonds outstanding at a price of $1,075 per bond. The bonds mature in 9 years, have a face value of $1,000, and have a coupon rate of 11% with semiannual payments. The firm expects to change their capital structure and will have a future debt ratio of 70%, a cost of equity (required return) of 15%, and a cost of debt (Yield to Maturity) of 10%. The firm has a marginal tax rate of 40%.
1. What is the required return on their stock using CAPM?
a) 8.8% b) 10.6% c) 13.6% d) 16.6%
2. What is the expected return on their stock using the constant growth dividend discount model?
a) 10.8% b) 12.3% c) 13.9% d) 15.6%
3. What is the yield to maturity on their debt (Cost of Debt)?
a) 8.82% b) 9.36% c) 9.73% d) 9.93%
4. What is their current percent equity using market value capital structure?
a) 18% b) 29% c) 43% d) 65%
5. What is their Weighted Average Cost of Capital using their future expected capital structure, cost of equity and cost of debt?
a) 8.7% b) 10.3% c) 11.3% d) 11.6%
6. What will be their new stock price given the new required return?
a) $24.30 b) $26.75 c) $32.50 d) $36.50
7. What will be their new bond price given the new Yield to Maturity?
a) $954 b) $1,058 c) $1,117 d) $1,143
Explanation / Answer
1. 4 +1.2*8= 13.6 c)
2. 2(1.07)/r-.07= 40 r= .1235 12.35% b)
3. Using a bond calculator 9.73 c)
4. 240,000,000/369,000,000= 65% D)
5, 10(1-.4)*.7 +15*.3= 8.7 a)
6.2(1.07)/(.15-.07)= 26.75 b)
]7. Using a bond calculator 1058 b)