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

question 182

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:

Photosynthesis

The process by which green plants and some other organisms use sunlight to synthesize foods from carbon dioxide and water, generating oxygen as a byproduct.

Carbon Dioxide

This gas, which has no color and no smell, is generated when carbon and organic substances burn and through the act of respiration. It is a natural component of the air and is utilized by plants for photosynthesis.

Sugar

A sweet-flavored substance derived from various plants, primarily sugar cane and sugar beet, consisting chiefly of sucrose, and used as a sweetener in food and drink.

Starches

Complex carbohydrates composed of numerous glucose units, serving as a vital energy store in many plants.