QUESTION 1 You were hired as a consultant to Gambono Company, whose target capit

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QUESTION 1 You were hired as a consultant to Gambono Company, whose target capital structure is 40% debt, 15% preferred and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.00%. The firm will not be issuing any new stock, what is its WACC? a. 7.68% b. 8.93% c. 6.69% @ d. 6.96% @ e. 7.59% QUESTION 2 Suppose you borrow $10,000 right now to start a business. If the terms of the loan require you to pay back $13,000 in 5 years, what is the implied annual compound interest rate? 6.00% 5.39% @ 30.00% @ 5.00% None of these Click Save and Submit to save and submit. Clhick Save All Answers to save all answers. Save All Answer

Explanation / Answer

1.

WACC is calculated below:

WACC = (40% × 6%) + (15% × 7.50%) + (45% × 12%)

= 2.40% + 1.125% + 5.40%

= 8.93%

WACC of company is 8.93%.

2.

Annual Compound rate = [($13,000 - $10,000) ^ (1 / 5)] - 1

= 1.0539 - 1

= 5.39%

Annual Compound rate is 5.39%.

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