Water's Beginning has 1 million shares of common stock outstanding with a market price of...
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Water's Beginning has 1 million shares of common stock outstanding with a market price of $12 per share. The firm's outstanding bonds have ten years to maturity, a face value of $5 million, a coupon rate of 10%, and are priced at $985. The risk-free rate is 7%, and analysts' expected return for the market is 14%. Water's Beginning stock has a beta of 1.2 and is in the 34% marginal tax bracket. The firm expects to give a dividend of $0.85 at the end of the year and believes its dividends will grow at an 8% annual rate.
5. Compare the magnitude of the cost of debt with the cost of equity. Should the one you found to be higher always be higher? Why or why not?
6. If Water's Beginning changed its capital structure to have more debt, how would the weighted average cost of capital change? Why?
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