Q&P Q17 (with modification) The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 60,000 bonds with a coupon rate of 6%, current price of 109.5, YTM is 5.23%; the bonds have 20 years to maturity. Another 230,000 zero coupon bonds with a price quote of 17.5, YTM of 5.9% and 30 years until maturity. Preferred stock: 150,000 shares of $4 (i.e. 4% of par) preferred stock with a current price of $79, and a par value of $100. Common stock: 2,600,000 shares of common stock; the current price is $65, and the beta of the stock is 1.15. Market: The corporate tax rate is 40%, the market risk premium is 7%, and the risk-free rate is 4%. Q&P Q19 Floyd Industries stock ahs a beta of 1.3. The company just paid a dividend of $0.95, and the dividends are expected to grow at 4.5% per year. The expected return on the market is 11%, and Treasury bills are yielding 4.3%. The most recent stock price for Floyd is $64. a. Calculate the cost of equity using the DDM method. b. Calculate the cost of equity using the SML method. c. Why do you think your estimates in (a) and (b) are so different?

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