Weighted Average Cost of Capital (WACC)

1. Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

• The company can issue bonds at a yield to maturity of 8.4 percent.
• The cost of preferred stock is 9 percent.
• The company's common stock currently sells for $30 a share.
• The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 6 percent per year.
• Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued.
• The company’s tax rate is 30 percent.

What is the company’s weighted average cost of capital (WACC)?(3 points)

2. An investor is forming a portfolio by investing $50,000 in stock A which has a beta of 1.50, and $25,000 in stock B which has a beta of 0.90. The return on the market is equal to 6 percent and Treasury bonds have a yield of 4 percent. What is the required rate of return on the investor's portfolio?(2 points)