Question 1
Company Marvel has been in the filmmaking industry for quite a
while and is specialized in making sci-fi and superhero movies. Due
to recent advancement of digital technology and 5G internet, the
company decides to set up a subsidiary company (Company Cyrus),
which will specialize to focus on the development of filmmaking and
internet related technology. This will further improve the
company’s comparative advantage in filmmaking industry and capture
the latest trend and taste in the younger generation per comment
from its CEO.
The total capital requirement of Company Cyrus will be at $30
million in total in market value term in the beginning. Company
Marvel decides to finance Company Cyrus’ operations with 40 percent
corporate bond, 20 percent of preferred stock and 40 percent common
stock. Company Marvel’s current net income is $18 million with a
dividend payout ratio of 30%.
Company Marvel currently has outstanding corporate bond of its
own for $1 million notional amount in aggregate. The annual coupon
rate of this bond is 8% and it is paid annually. The bond still has
5 years to maturity. The bond is currently traded in the bond
market for
$924,184 in aggregate total.
The preferred stock issued by Company Marvel have a perpetuity
annual dividend payment of 6% for every $100 notional per share.
Preferred stock is currently traded in the market for $75 per
share.
Company Marvel’s common stock is currently traded at $60 per
share, and its current dividend payout is $5 per share. The
dividend is also expected to grow at a constant rate of 10% a year
forever. The flotation cost of external equity, if it is issued, is
5% of the dollar amount issued. Assume the tax rate is 25%. (Please
show your calculations in all below question from
(a) to (e))
Required:
(a) (b) (c) What is Company Marvel’s cost of common stock?
What is Company Marvel’s cost of debt?What is Company Marvel’s cost
of preferred stock?
(d) Does Company Marvel need to issue new com
Please use basic formulas for calculation and do not use Excel
for calculation!thanks