Question

Acme Services' CFO is considering whether to take on a new project that has average risk. She has collected the following information: • The company has outstanding bonds that mature in 26 years. The bonds have a face value of $1,000, an annual coupon of 7.5%, and sell in the market today for $920. There are 10,000 bonds outstanding. The risk-free rate is 6%. • The market risk premium is 5%. • The stock's beta is 1.2. The company's tax rate is 40%. The company has 50,000 shares of preferred stock with a par value of $100. These shares are currently trading at $105, and pay an annual dividend of $5.40. • The company also has 1,850,000 common shares trading at $25. These shares last paid an annual dividend of $0.93.

Answer 1

As per the details given in the question-

Correct Answer is option -B
Enter the stroke in the financial calculator-
N =26
Fv = 1000
PV = -920
PMT = 75 (1000*7.5% = 75)
CPT - I/Y = 8.26%
Before cost of debt =8.26%

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