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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%

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 ...

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