Hint:
When a bond is sold at higher than its par or face value, its coupon rate is higher than its yield or return.
When a bond is sold at lower than its par or face value, its coupon rate is lower than its yield or return.
When a bond is sold at its par or face value, its coupon rate is equal to its yield or return.





Long term loans consist entirely of long-term bonds that have coupon rate of 7.6% and
yield to maturity of 11.8% since they are trading at below face value.
Preferred stock pays quarterly dividend of $2 per share and is trading at $80 per share.
(Hint: You need annual dividend for calculating cost of preferred stock)
Price of common stock is $20 per share. Its expected dividend is $1.08. Dividend is
expected to grow at constant rate of 8%. (Hint: D0 is current dividend and D0(1+g)
calculates expected dividend after it has grown at rate of g)
Stock has beta of 1.6. Government bond yield is 6% and Market risk premium is 5%.
(Hint: Market risk premium is the premium that the market is charging in addition to risk
free rate and not the market’s required rate of return).
Tax rate is 25%.
a) What is the market value of WACC using dividend model for calculating cost of common
equity?
b) What is market value of WACC using CAPM (Capital Asset Pricing Model) for calculating
cost of common equity?
r = RFR + (RM-RFR)b is called CAPM model
c) What is the book value of WACC using dividend model for calculating cost of preferred
equity and CAPM model for calculating cost of common equity? (Hint: You will use
coupon rate for bonds while calculating cost of debt under book WACC and not bond
yield)