Question 1: Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. It's pretax cost of preferred equity is 7%, and it's pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighed average cost of capital?
a) between 7% and 8%
b) between 8% and 9%
c) between 9% and 10%
d) between 10% and 12%
Question 2: Given an optimal capital structure that is 50% debt and 50% common stock, calculate the weighted average cost of capital for Stone Corp given the following additional information:
Bond coupon rate 14%
Bond yield to maturity 10%
Dividend, expected $5
Price, common $100
Growth rate 8%
Corporate tax rate 30%
a) less than 9.5%
b) more than 9.5% and less than 10.25%
c) more than 10.25 and less than 11%
d) more than 11%