1. Peter’s Audio has 72,000 bonds outstanding that are selling at par value. The bonds have a yield to maturity of 6.95 percent. The company also has 5 million shares of common stock outstanding. The stock has a beta of 1.25 and sells for $28 a share. The U.S. Treasury bill is yielding 3 percent and the market risk premium is 7 percent. Peter's tax rate is 35 percent. What is Peter's weighted average cost of capital?
A. 7.48%
B. 9.29%
C. 10.38%
D. 10.91%
E. 11.02%
2. You purchase a machine for $12,000, depreciated straight-line to a salvage value of $2,000 over its 5 year life. If the machine is sold at the end of the third year for $7,500, what are the after tax proceeds from the sale, assuming your tax rate is 34%?
a) $6,990
b) $7,160
c) $7,210
d) $7,390
e) $7,500