# If the pure expectations hypothesis holds, what does the mar

____ 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%

https://brainmass.com/business/bond-valuation/if-the-pure-expectations-hypothesis-holds-what-does-the-mar-277747

#### 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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