Debt: 1000 units 7% annual coupon bonds outstanding, 20 years to maturity and a quoted price of 90.125. note bond prices are quoted as a percentage of the face value.

Preferred stock: 1100 shares of 8% preferred outstanding selling at $83 per share. 

Common stock: 50000 shares of common stock selling for 35 per share. 

The stock has a beta of 1.3 and will pay a dividend of 3.25 next year. 

The dividend is expected to grow by 5% per year indefinitely. 

Market: a 12% expected return and 4% risk free rate.

A) Assuming capm is the correct model, is the common stock overpriced/underpriced/fairly priced? Support your response.

B) Calculate the WACC. Assume the tax rate is 35%

Answer rating: 100% (QA)

A To determine if the common stock is overpriced underpriced or fairly priced we can use the Capital Asset Pricing Model CAPM to calculate the expecte... View the full answer