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solution

Given the following information for a publicly traded firm:

  • Tax rate is 20%
  • Terms of long-term debt: The price of the bond with 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $934.71. There are 100,000 bonds. Any new bonds would be privately placed with no flotation cost.
  • Terms of short-term debt: The company does not use short-term interest-bearing debt on a permanent basis.
  • The current price of the firm’s 10%, $100 par value, monthly dividend, preferred stock is $120. There are 200,000 outstanding shares. Any new preferred stock issued will incur no flotation cost.
  • The firm’s common stock is currently selling at $20 per share. There are 10 million outstanding shares. Its last dividend paid was $2.15 per share, and dividends are expected to grow at a constant rate of 3% in the foreseeable future.

2. Refer to Exhibit 1. What are the market value weights be IF we were going to calculate the WACC using market values?

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