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    If the pure expectations hypothesis holds, what does the mar

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    ____ 9. If the pure expectations hypothesis holds, what does the market expect that the one-year rate will be one year from now?
    a. 6.0%
    b. 5.5%
    c. 6.5%
    d. 5.0%
    e. 7.0%

    Burlees Inc.'s CFO has collected the following information to calculate its WACC:

    ? The company's capital structure consists of 40% debt and 60% common stock.
    ? The company has 25-year, 12% annual coupon bonds that have a face value of $1,000 and sell for $1,252.
    ? The company uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 5% and the market risk premium is 6%. The company's common stock has a beta of 1.6.
    ? The company's tax rate is 40%.

    ____ 15. What is the company's weighted average cost of capital (WACC)?
    a. 10.5%
    b. 12.5%
    c. 11.5%
    d. 11.0%
    e. 12.0%

    ____ 16. What is the company's after-tax cost of debt?
    a. 4.80%
    b. 8.33%
    c. 7.20%
    d. 3.74%
    e. 5.62%

    ____ 17. What is the company's cost of common equity?
    a. 18.91%
    b. 14.60%
    c. 17.60%
    d. 14.00%
    e. 9.65%

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    Solution Preview

    SCENARIO 6-1

    Looking in today's newspaper, you observe the following yield curve information:

    Maturity Yield
    1 year 5.0%
    2 years 5.5
    3 years 6.0
    4 years ???
    5 years 7.0

    ____ 9. If the pure expectations hypothesis holds, what does the market expect that the one-year rate will be one year from now?
    a. 6.0%
    b. 5.5%
    c. 6.5%
    d. 5.0%
    e. 7.0%

    Answer: B

    Burlees Inc.'s CFO has collected the following information to calculate its WACC:

    ? The company's capital ...

    Solution Summary

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