Question 1 1 pts ABC Industries will pay a dividend of $3 next year on their com

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Question 1 1 pts

ABC Industries will pay a dividend of $3 next year on their common stock. The company predicts that the dividend will increase by 7 percent each year indefinitely. What is the dividend yield if the stock is selling for $27 a share?

Enter your answer in percentages rounded off to two decimal points. DO not enter % in the answer box.

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Question 2 1 pts

The 8.5 percent annual coupon bonds of the ABC Co. are selling for $1,179. The bonds mature in 12 years. The bonds have a par value of $1,000. If the tax rate is 30%, what is the after-tax cost of debt?

Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box.

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Question 3 1 pts

You were hired as a consultant to ABC Company, whose target capital structure is 35% debt, 15% preferred, and 50% common equity.  The before-tax cost of debt is 6.50%, the yield on the preferred is 6.00%, the cost of common stock is 11.25%, and the tax rate is 40%. What is the WACC?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Explanation / Answer

1. Dividend yield = Dividend/Price
   = 3/27
   = 0.1111
   = 11.11%
Answer box = 11.11

2. before tax cost of debt on the bond using the excel

NPER = 12
PMT = -85 ( since payment is done)
PV = 1179
FV = -1000 ( since the amount will be paid)
Type = 0
The formula is =Rate(12,-85,1179,-1000,0)
This will give before tax cost of debt as 6.33%.

after tax cost of debt = before tax cost of debt*(1-tax rate)
      = 6.33%*(1-30%)
      =6.33%*70%
   =0.04431 or 4.43%

Answer box = 4.43

3. Given
Weight for debt = 35%
before tax cost of debt = 6.50%
weight for preferred stock = 15%
cost of preferred stock= 6%
weight for equity = 50%
cost of equity = 11.25%
tax rate = 40%

wacc = wd*kd(1-tax rate) + wp*kp + we*ke
wacc = 35%*6.50%*(1-40%) + 15%*6%+50%*11.25%
   = 7.89%
Answer box (7.89)

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