Relates to the firm weighted average cost of capital

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1. Watson's Automotive has a $400,000 bond issue outstanding that is selling at 102 percent of face value. Watson's also has 4,500 shares of preferred stock and 21,000 shares of common stock outstanding. The preferred stock has a market price of $44 a share compared to a price of $21 a share for the common stock. What is the weight of the debt as it relates to the firm's weighted average cost of capital? Round answer to the nearest percent.

A. 42 percent

B. 39 percent

C. 41 percent

D. 38 percent

E. 40 percent

2. The Satellite Building Company has fallen on hard times. Its management expects to pay no dividends for the next 2 years. However, the dividend for Year 3, D3, will be $1.00 per share, and the dividend is expected to grow at a rate of 3 percent in Year 4, 6 percent in Year 5, and 10 percent in Year 6 and thereafter. If the required return for Satellite is 20 percent, what is the current equilibrium price of the stock?

a. $0 b. $5.26 c. $6.34 d. $12.00 e. $13.09

Reference no: EM131937337

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