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Question 2 The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium's WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president?

Question 2 The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium's WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president?

EBK CFIN
EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 15PROB
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Question 2 The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium's WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president? Question The market risk premium for FCIB is 9 percent, and has a tax rate of 35 percent. The risk-free rate of interest is 5%. Willow-Woods Inc. has a capital structure comprised of the following: 8,500,000 shares of common stock outstanding, 200,000 shares of 7 percent preferred stock outstanding, and 85,000, 8.5 percent semiannual bonds outstanding, par value of $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.2, the preferred stock currently sells for $83 per share, and the bonds have 15 years to maturity and sell for 93 percent of par. a) What is the market value of Willow-Woods’ capital structure2 b) What rate should Willow-Woods should use to discount the cash flows of a new investment project that has the same risk as the company's typical project?
Transcribed Image Text:Question 2 The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium's WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president? Question The market risk premium for FCIB is 9 percent, and has a tax rate of 35 percent. The risk-free rate of interest is 5%. Willow-Woods Inc. has a capital structure comprised of the following: 8,500,000 shares of common stock outstanding, 200,000 shares of 7 percent preferred stock outstanding, and 85,000, 8.5 percent semiannual bonds outstanding, par value of $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.2, the preferred stock currently sells for $83 per share, and the bonds have 15 years to maturity and sell for 93 percent of par. a) What is the market value of Willow-Woods’ capital structure2 b) What rate should Willow-Woods should use to discount the cash flows of a new investment project that has the same risk as the company's typical project?
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