Match the Weighted Average Cost of Capital to each of the scenarios given for AB

Question

Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation. Target capital structure: 31% debt, 9% preferred stock and 60% common equity. Yield to maturity on bonds: 9.0%; Preferred stock dividend: $6.11 per year; current market price of preferred stock is $68.61. CAPM data for common equity: risk-free rate is 3.3%; market risk premium for the average stock is 4.1%; ABC has a beta of 2.02. ABC's marginal tax rate is 40%. Target capital structure: 65% debt, 9% preferred stock and 26% common equity. Yield to maturity on bonds: 8.1%; Preferred stock dividend: $7.87 per year; current market price of preferred stock is $70.37. CAPM data for common equity: risk-free rate is 3.0%; market risk premium for the average stock is 21.4%; ABC has a beta of 0.54. ABC's marginal tax rate is 40%. Target capital structure: 48% debt, 8% preferred stock and 44% common equity. Yield to maturity on bonds: 7.6%; Preferred stock dividend: $6.70 per year; current market price of preferred stock is $69.20. CAPM data for common equity: risk-free rate is 3.2%; market risk premium for the average stock is 4.7%; ABC has a beta of 2.01. ABC's marginal tax rate is 40%. Target capital structure: 51% debt, 11% preferred stock and 38% common equity. Yield to maturity on bonds: 7.7%; Preferred stock dividend: $7.23 per year; current market price of preferred stock is $69.73. CAPM data for common equity: risk-free rate is 4.6%; market risk premium for the average stock is 7.3%; ABC has a beta of 1.22. ABC's marginal tax rate is 40%. Target capital structure: 34% debt, 6% preferred stock and 60% common equity. Yield to maturity on bonds: 5.2%; Preferred stock dividend: $6.53 per year; current market price of preferred stock is $69.03. CAPM data for common equity: risk-free rate is 4.1%; market risk premium for the average stock is 5.0%; ABC has a beta of 1.65. ABC's marginal tax rate is 40%. A. 8.53% B. 9.42% C. 9.04% D. 7.95% E. 8.63%

Explanation / Answer

1 Debt 0.31 Preferred stock 0.09 Common equity 0.6 Cost of debt 9% Prefered stock dividend 6.11 Prefered stock price 68.61 Cost of prefered stock 8.91% Prefered stock dividend/Prefered stock price Risk free rate 3.30% Market risk premium 4.10% Beta 2.02 Cost of equity 11.58% risk free rate + beta* market risk premium tax rate 40% WACC 9.42% risk free rate + beta* market risk premium 2 Debt 0.65 Preferred stock 0.09 Common equity 0.26 Cost of debt 8% Prefered stock dividend 7.87 Prefered stock price 70.37 Cost of prefered stock 11.18% Prefered stock dividend/Prefered stock price Risk free rate 3.00% Market risk premium 21.40% Beta 0.54 Cost of equity 14.56% risk free rate + beta* market risk premium tax rate 40% WACC 7.95% risk free rate + beta* market risk premium 3 Debt 0.48 Preferred stock 0.08 Common equity 0.44 Cost of debt 7.6% Prefered stock dividend 6.7 Prefered stock price 69.2 Cost of prefered stock 9.68% Prefered stock dividend/Prefered stock price Risk free rate 3.20% Market risk premium 4.70% Beta 2.01 Cost of equity 12.65% risk free rate + beta* market risk premium tax rate 40% WACC 8.53% risk free rate + beta* market risk premium 4 Debt 0.51 Preferred stock 0.11 Common equity 0.38 Cost of debt 7.7% Prefered stock dividend 7.23 Prefered stock price 69.73 Cost of prefered stock 10.37% Prefered stock dividend/Prefered stock price Risk free rate 4.60% Market risk premium 7.30% Beta 1.22 Cost of equity 13.51% risk free rate + beta* market risk premium tax rate 40% WACC 8.63% weighted average of all three 4 Debt 0.51 Preferred stock 0.11 Common equity 0.38 Cost of debt 7.7% Prefered stock dividend 7.23 Prefered stock price 69.73 Cost of prefered stock 10.37% Prefered stock dividend/Prefered stock price Risk free rate 4.60% Market risk premium 7.30% Beta 1.22 Cost of equity 13.51% risk free rate + beta* market risk premium tax rate 40% WACC 8.63% weighted average of all three 5 Debt 0.34 Preferred stock 0.06 Common equity 0.6 Cost of debt 5.2% Prefered stock dividend 6.53 Prefered stock price 69.03 Cost of prefered stock 9.46% Prefered stock dividend/Prefered stock price Risk free rate 4.10% Market risk premium 5.00% Beta 1.65 Cost of equity 12.35% risk free rate + beta* market risk premium tax rate 40% WACC 9.04% weighted average of all three

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