1 For the following company what is the correct weight of th

1) For the following company, what is the correct weight of the company\'s common stock? Preferred stock $350 million, Bonds $400 million, Common $685 million.

Question 1 options:

A)

25%

B)

28%

C)

24%

D)

48%

2) What is the cost of the following preferred stock? Price $32.55 per share. Dividend $4.11 per share.

Question 2 options:

A)

13%

B)

7.22%

C)

9%

D)

8%

3) What is the cost of the following common stock? Price $44.82 per share. Dividend $1.56 per share. Expected growth rate 6% per year.

Question 3 options:

A)

6%

B)

3%

C)

9%

D)

12%

4) What is the cost of the following bond? Maturity 20 years, Face value $1,000, coupon 8%, Yield 9%, tax rate 22%

Question 4 options:

A)

9%

B)

8%

C)

Cannot calculate without further information

D)

7%

5) Calculate the WACC for the following: Bonds $100 million (with a cost of 8%), common $200 million (with a cost of 6%), Preferred $50 million (with a cost of 9%).

Question 5 options:

A)

8.43%

B)

9.65%

C)

7.00%

D)

10.29%

	A) 25%
	B) 28%
	C) 24%
	D) 48%

Solution

1)

Correct option is > D) 48%

Weight of common stock = Common stock / (Common stock + Preferred stock + Debt)

= 685/(685+350+400)

= 48%

2)

Correct option is > A) 13%

Cost of preferred stock

= Dividend / Price

= 4.11/32.55

3)

Correct option is > C) 9%

Cost of common stock = (Dividend / Stock price) + Growth rate

Cost of common stock = (1.56/44.82) + 6%

Cost of common stock = 9%

4)

Correct option is > D) 7%

Cost of debt = Yield x (1-Tax)

= 9% x (1-22%)

= 7%

5)

Correct option is > = 6% x 57.14% + 9% x 14.29% + 8% x 28.57%

WACC = Cost of equity x Weight of equity + Cost of preferred x Weight of preferred + Cost of debt x Weight of debt

Particular

Amt

Weight

Debt

100

28.57%

Equity

200

57.14%

Preferred

50

14.29%

Total

350

WACC = 6% x 57.14% + 9% x 14.29% + 8% x 28.57%

WACC = 7%

Particular	Amt	Weight
Debt	100	28.57%
Equity	200	57.14%
Preferred	50	14.29%
Total	350