1.Given the following information, calculate the WACC:
Common Stock: constant growth dividend of 5%
Do is $4.00
Current stock price is $60.00 with 2 million shares
Preferred Stock Dividend is $7.0
Preferred stock price is $100.00 with 400,000 shares Tax rate 35%
Debt 7 percent coupon bonds with a 6.75% YTM
Bond currently sells at 95 with 100,000 bonds
a) calculate the WACC: show work
b) As a CFO, what could you do (and explain) to minimize the WACC for this problem?
2. Given an initial asset investment of $3 million, and projected cash flows of $700,000 per year for five years, and using the discount rate calculated in problem 1 above,
(round off the discount rate to the nearest whole number)
a) Calculate NPV: _____________
b) Calculate P.I.: _____________
c) Would you accept this project? Why/why not:
3. Given the following information:
The 91-day Treasury bill current yield is 3%, the market return is 10%, and the Beta of a stock is .8
a) Calculate the required return for the stock: _________________
b) Graph the corresponding SML, and include all labels:
c) If due to more recent news, the expected return of the stock was now 10% for the same Beta of .8, what would happen to the price of the stock and why?
d) Explain why all securities should normally be priced to fall on the security market line:
4. Bond problem
Given the following: a 10 year corporate bond with a $1,000 par value. The coupon rate is 6%.
If you own the bond for 4 years, and at the end of 4 years market interest rates are 7%, you then decide to sell the bond:
a) Calculate the new price of the bond: ______________
b)If you did not sell the bond, and you had originally bought the bond for $1,000, what would the YTM be at the bond's maturity? ______________