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Using the WACC equation

Question 1:
Company with a target structure of 60% debt and 40% common equity, with no preferred stock. The firm's cost of common equity is 12.5% and its WACC is 8.780%. If the firm's tax rate is 30% what is the before tax yield on this company's long term debt?

A. 8.4%
B. 9.0%
C. 9.8%
D. 8.2%
E. 9.4%

Question 2:
This same company can finance its capital budget and retain earnings throughout the foreseeable future and its stock price is expected to grow at a constant rate. This company long-run sustainable return on equity (ROE) is 15% and the firm expects to maintain payout ratio of 70%. If this company uses the DCF approach to calculate its cost of retained earnings, what is the expected dividend yield on this company's stock

A. 2.0%
B. 2.9%
C. 8.0%
D. 4.5%
E. 6.1%

Please provide spreadsheet to explain work.

Thanks

Solution Preview

Using the WACC equation
Question 1:
Company with a target structure of 60% debt and 40% common equity, with no preferred stock. The firm's cost of common equity is 12.5% and its WACC is 8.780%. If the firm's tax rate is 30% what is the before tax yield on this company's long term debt?

A. 8.4%
B. 9.0%
C. 9.8%
D. 8.2%
E. 9.4%

Answer: ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the before tax yield on this company's long term debt.

$2.19