1. The 8.5 percent annual coupon bonds of the ABC Co. are selling for $1,179. The bonds

| June 4, 2016

Question
1. The 8.5 percent annual coupon bonds of the ABC Co. are selling for $1,179. The bonds mature in 12 years. The bonds have a par value of $1,000. If the tax rate is 30%, what is the after-tax cost of debt?

2. Several years ago, the ABC Company sold a $1,000 par value bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is 40%. What is the after-tax cost of debt?

3. If the market value of debt is $109,506, market value of preferred stock is $95,107, and market value of common equity is 220,391, what is the weight of common equity?

4. The 8 percent annual coupon bonds of the ABC Co. are selling for $1,080.69. The bonds mature in 10 years. The bonds have a par value of $1,000. What is the before-tax cost of debt?

5. If the market value of debt is $137,734, market value of preferred stock is $55,749, and market value of common equity is 287,492, what is the weight of preferred stock?

6. The ABC Company has a cost of equity of 24.8 percent, a pre-tax cost of debt of 7.6 percent, and a tax rate of 31 percent. What is the firm’s weighted average cost of capital if the proportion of debt is 70.3%?

7. The 8 percent annual coupon bonds of the ABC Co. are selling for $880.76. The bonds mature in 10 years. The bonds have a par value of $1,000 and payments are made semi-annually? What is the before-tax cost of debt?

8. ABC Inc.’s perpetual preferred stock sells for $74.5 per share, and it pays an $5.8 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of $4 per share. What is the company’s cost of preferred stock for use in calculating the WACC?

9. ABC Industries will pay a dividend of $1 next year on their common stock. The company predicts that the dividend will increase by 7 percent each year indefinitely. What is the firm’s cost of equity if the stock is selling for $37 a share?

10. ABC Industries will pay a dividend of $1 next year on their common stock. The company predicts that the dividend will increase by 5 percent each year indefinitely. What is the dividend yield if the stock is selling for $24 a share?

11. The before-tax cost of debt is 5.2 percent. What is the after-tax cost of debt if the tax rate is 51 percent?

12. ABC, Inc., has 900 shares of common stock outstanding at a price of $29 a share. They also have 720 shares of preferred stock outstanding at a price of $90 a share. There are 60, 8 percent bonds outstanding that are priced at $9. The bonds mature in 16 years and pay interest semiannually. What is the capital structure weight of the preferred stock?

13. The 7 percent annual coupon bonds of the ABC Co. are selling for $950.41. The bonds mature in 8 years. The bonds have a par value of $1,000 and payments are made semi-annually. If the tax rate is 35%, what is the after-tax cost of debt?

14. You were hired as a consultant to ABC Company, whose target capital structure is 35% debt, 15% preferred, and 50% common equity. The before-tax cost of debt is 6.50%, the yield on the preferred is 6.00%, the cost of common stock is 11.25%, and the tax rate is 40%. What is the WACC?

15. A stock’s next dividend is expected to be $1.4. The required rate of return on stock is 17.2%, and the expected constant growth rate is 6.7%. What is the stock’s current price?

16. ABC Enterprises’ stock is expected to pay a dividend of $1.9 per share. The dividend is projected to increase at a constant rate of 8.9% per year. The required rate of return on the stock is 15.6%. What is the stock’s expected price 3 years from today (i.e. solve for P3)?

17. ABC just paid a dividend of D0 = $4.6. Analysts expect the company’s dividend to grow by 31% this year, by 23% in Year 2, and at a constant rate of 7% in Year 3 and thereafter. The required return on this stock is 16%. What is the best estimate of the stock’s current market value?

18. If last dividend = $7.8, g = 2.2%, and P0 = $79.6, what is the stock’s expected total return for the coming year?

19. ABC Inc., is expected to pay an annual dividend of $2.9 per share next year. The required return is 12 percent and the growth rate is 8 percent. What is the expected value of this stock five years from now?

20. If D1 = $5.2, g (which is constant) = 2.1%, and P0 = $79.9, what is the stock’s expected total return for the coming year?

21. If D1 = $3.31, g (which is constant) = 2%, and P0 = $67.26, what is the stock’s expected dividend yield for the coming year?

22. ABC’s last dividend paid was $1.3, its required return is 13.2%, its growth rate is 5%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years, i.e., what is P7?

23. The common stock of Connor, Inc., is selling for $36 a share and has a dividend yield of 4.9 percent. What is the dividend amount?

24. The common stock of Wetmore Industries is valued at $25.6 a share. The company increases their dividend by 4.7 percent annually and expects their next dividend to be $3.8. What is the required rate of return on this stock?

25. ABC’s stock has a required rate of return of 11.2%, and it sells for $55 per share. The dividend is expected to grow at a constant rate of 6.1% per year. What is the expected year-end dividend, D1?

26. A stock just paid a dividend of D0 = $1.3. The required rate of return is rs = 13.9%, and the constant growth rate is g = 5.4%. What is the current stock price?

27. A stock just paid a dividend of $1.3. The required rate of return is 17.9%, and the constant growth rate is 5%. What is the current stock price?

28. A stock is expected to pay a dividend of $2.2 at the end of the year. The required rate of return is rs = 16.1%, and the expected constant growth rate is g = 6%. What is the stock’s current price?

29. ABC Company’s last dividend was $3.7. The dividend growth rate is expected to be constant at 28% for 2 years, after which dividends are expected to grow at a rate of 6% forever. The firm’s required return (rs) is 12%. What is its current stock price (i.e. solve for Po)?

30. ABC is expected to pay a dividend of $3 per share at the end of the year. The stock sells for $51 per share, and its required rate of return is 12.8%. The dividend is expected to grow at some constant rate, g, forever. What is the growth rate (i.e. solve for g)?

31. ABC Enterprises’ stock is currently selling for $68.4 per share. The dividend is projected to increase at a constant rate of 5.8% per year. The required rate of return on the stock is 12%. What is the stock’s expected price 5 years from today (i.e. solve for P5)?

32. ABC’s last dividend was $2.7. The dividend growth rate is expected to be constant at 25% for 3 years, after which dividends are expected to grow at a rate of 7% forever. If the firm’s required return (rs) is 17%, what is its current stock price (i.e. solve for Po)?

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