QUESTION 2 You were hired as a consultant to Gambono Company, whose target capit

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QUESTION 2 You were hired as a consultant to Gambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.00%. The firm will not be issuing any new stock, what is its wACC? a. 6.96% () b. 7.68% c. 6.69% d. 8.93% e. 7.59% QUESTION 3 How much money will you have in 14 years if you invest $10,000 in a savings account that earns an annual interest rate of 6% compounded monthly? $22,609.04 $10,723.21 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers e

Explanation / Answer

Question 2 - WACC = (share of debt*after tax cost of debt) + (share of preferred share*cost if preferred shares) + (share of common equity*cost of retained earnings)

Share of debt = 40%

After tax cost of debt = 6%

Share of preferred stock = 15%

Cost of preferred stock = 7.5%

Share of common equity = 45%

Cost of retained earnings = 12%

WACC = (0.4*6) + (0.15*7.5) + (0.45*12) = 8.93%

Therefore, answer is option 'd' i.e. 8.93%

b) Initial investment = $10,000

Annual interest rate = 6% compounded monthly

Monthly interest rate = 6/12 = 0.5%

Time of investment = 14 years i.e 14*12 = 168 months

Future value = PV*(1+r)n, where r is interest rate and n is number of periods

r = 0.5%

n = 168 months

FV = 10,000*(1+0.005)168 = $23115.24

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