02 Jan Market Information:

Question 1

10 / 10 pts

Eaglet Corporation has the following target and costs associated with its capital structure. Based on these parameters what is Eaglet Corporations weighted average cost of capital?

Target common equity weight: 50 percent

Target debt weight: 50 percent

Cost of equity: 12 percent

Cost of debt: 4 percent

Tax rate: 35 percent

WACC = 7.3 percent

WACC = 5.2 percent

WACC = 8.0 percent

Question 2

15 / 15 pts

Riddle Industries has the following parameters related to its stock and firm.

Beta: 1.1

Recent Dividend 1.05 dollars

Dividend Growth Rate 4.5 percent

Expected return on market 11.0 percent

Treasury Bills Yield 4.3 percent

Most recent stock price 64.00 dollars

What is the cost of equity using DDM? What is the cost of equity using SML?

6.21 percent, 11.67 percent

6.01 percent, 7.37 percent

4.5 percent, 11.00 percent

Question 3

15 / 15 pts

Given the following information for UARE Inc. Find the WACC.

Tax rate 35 percent

Debt:

Bonds outstanding: 6000

Coupon on bonds: 4 percent

Par value of bonds: $1000

Bonds selling at what percent of par: 105

Bonds make coupon payments: semi-annually

Years to maturity of bonds 25

Common Stock:

Shares Outstanding: 185,000

Current price/share: $58.00

Beta: 1.10

Market Information:

Risk premium: 7 percent

Risk-free rate 5 percent

WACC = 8.89%

WACC = 8.45%

WACC = 9.37%