Problem 1:

BIM Company is considering a new project that to produce a new line of mobile phone. We have the capital structure and market data for BIM as follows:

Debt: 100,000 of 11 percent coupon bonds outstanding 5 years to maturity, $1000 par value each and the bonds have Yield to maturity of 10% and make semi-annual payment.

Preferred stock: 60,000 shares of 8.5 percent preferred stock outstanding, par = $200. Required return from preferred stock is 2% lower than the required return from common stock (hint: you have to calculate the required return for common stock by applying CAPM).

Common stock: 500,000 shares outstanding, the beta is 1.2, recent dividend = 4$, g = 5%

Market data: 13% expected average market return; Treasury bills has rate of return is 5%.

Tax: 40%

Require:

1. Calculate the price of bond, preferred stock and common stock?
2. Assuming that selling price is the calculated prices from (a). Calculate WACC?
3. If the firm decides to borrow money from a bank with interest rate of 10% instead of using preferred stock. Could you recalculate WACC.