# You were hired as a consultant to abc company, whose target capital

1. 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?

2. If the market value of debt is \$155,527, market value of preferred stock is \$78,829, and market

value of common equity is 312,100, what is the weight of preferred stock?

3. 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?

4.ABC Industries will pay a dividend of \$2 next year on their common stock. The company predicts

that the dividend will increase by 7 percent each year indefinitely. What is the dividend yield if the

stock is selling for \$33 a share?

5. 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?

6. ABC, Inc., has 113 shares of common stock outstanding at a price of \$97 a share. They also have

397 shares of preferred stock outstanding at a price of \$54 a share. There are 414, 8 percent bonds

outstanding that are priced at \$33. The bonds mature in 16 years and pay interest semiannually.

What is the capital structure weight of the preferred stock?

7. 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?

8. 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?

9. 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?

10. ABC Inc.’s perpetual preferred stock sells for \$58.1 per share, and it pays an \$6.7 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?

11. The before-tax cost of debt is 6 percent. What is the after-tax cost of debt if the tax rate is 41

percent?

12. The ABC Company has a cost of equity of 23.8 percent, a pre-tax cost of debt of 5 percent, and

a tax rate of 31 percent. What is the firm’s weighted average cost of capital if the proportion of debt

is 39.9%?

13. ABC Industries will pay a dividend of \$2 next year on their common stock. The company predicts

that the dividend will increase by 6 percent each year indefinitely. What is the firm’s cost of equity if

the stock is selling for \$33 a share?

14. If the market value of debt is \$128,737, market value of preferred stock is \$68,840, and market

value of common equity is 200,589, what is the weight of common equity?

15. ABC’s last dividend paid was \$2.6, its required return is 16%, its growth rate is 3.7%, 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?

16. If D1 = \$4.26, g (which is constant) = 2%, and P0 = \$67.54, what is the stock’s expected

dividend yield for the coming year?

17. A stock is expected to pay a dividend of \$2.4 at the end of the year. The required rate of return

is rs = 11.4%, and the expected constant growth rate is g = 7.5%. What is the stock’s current price?

18. A stock’s next dividend is expected to be \$1.8. The required rate of return on stock is 16.3%,

and the expected constant growth rate is 7.6%. What is the stock’s current price?

19. If D1 = \$2.1, g (which is constant) = 2.4%, and P0 = \$60.5, what is the stock’s expected total

return for the coming year?

20. A stock just paid a dividend of \$0.6. The required rate of return is 11%, and the constant growth

rate is 3.9%. What is the current stock price?

21. ABC just paid a dividend of D0 = \$4. Analysts expect the company’s dividend to grow by 33%

this year, by 28% in Year 2, and at a constant rate of 6% in Year 3 and thereafter. The required

return on this stock is 17%. What is the best estimate of the stock’s current market value?

22. The common stock of Connor, Inc., is selling for \$89 a share and has a dividend yield of 3.9

percent. What is the dividend amount?

23. ABC’s last dividend was \$3.1. The dividend growth rate is expected to be constant at 20% for

3 years, after which dividends are expected to grow at a rate of 5% forever. If the firm’s required

return (rs) is 16%, what is its current stock price (i.e. solve for Po)?