A Firm Uses 55% Equity and 45% Debt for All

question 248

Multiple Choice

A firm uses 55% equity and 45% debt for all of its financing needs. Shares of the common stock sell at $43. The company expects to pay $1.30 in dividends next year and increase that amount by 3% annually. The bonds have a 7% coupon rate and a yield-to-maturity of 6.8%. The company has a beta of 1.39 and a 34% marginal tax rate. What is the WACC?

• A) 5.33%
• B) 5.48%
• C) 5.88%
• D) 6.03%
• E) 6.37%

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Definitions:

Mature Industrial

Pertains to an industrial phase characterized by stable growth, well-established industries, and lower levels of innovation compared to earlier growth phases.

Transitional Period

A phase of change from one state or condition to another, often characterized by uncertainty and development.

Replacement Level Fertility

The fertility rate at which a population exactly replaces itself from one generation to the next, without migration, typically around 2.1 children per woman.

Total Fertility Rate

An estimate of the average number of children a woman will have during her reproductive years, typically used as an indicator of population growth.