90.2K

Verified Solution

Link Copied!

Use the following information concerning Pittsburgh Steel Inc. for questions 1 through 6:

Debt: 7,000, 7.5% coupon bonds outstanding, with 20 years to maturity, and quoted price of 108. These bonds pay interest semiannually. The face value of each bond is $1,000.

Common Stock: 180,000 shares of common stock selling for $60 per share. The stock has a beta of 0.90 and will pay a dividend of $2.80 next year. The dividend is expected to grow by 6% per year indefinitely.

Preferred Stock: 8,000 shares of 5.5% preferred stock selling at $94 per share.

Market: A 12% expected return, a 5% risk-free rate, and a 35% tax rate.

1. What is the market value of Pittsburgh Steel Incorporated's Debt?

a	a. $10,800,000
b	b. $7,560,000
c	c. $752,000
d	d. $7,000,000

2. Using the Capital Asset Pricing Model (CAPM), what is Pittsburgh Steel's cost of equity?

a	a. 10.67%
b	b. 6.00%
c	c. 7.50%
d	d. 11.30%

3. Using the dividend growth model, what is Pittsburgh Steel's cost of equity?

a	a. 10.67%
b	b. 6.00%
c	c. 7.50%
d	d. 11.30%

4. Pittsburgh Steel's after tax cost of debt is?

a	a. 6.76%
b	b. 4.40%
c	c. 2.63%
d	d. 35%

5. Pittsburgh Steel's cost of Preferred Stock is?

a	a. 5.85%
b	b. 5.50%
c	c. 12%
d	d. 5%

6. What is Pittsburgh Steel's Weighted Average Cost of Equity (WACC)? Note: Use the average of your two costs of equity estimates from questions #2 and #3 abvoe in your WACC calculation.

a	a. 10.00%
b	b. 12.70%
c	c. 8.18%
d	d. 9.82%

Answer & Explanation Solved by verified expert

See Answer