Question

Growth​ Company's current share price is $ 20.20 and it is expected to pay a $ 0.90 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 4.3 % per year.

a. What is an estimate of Growth​ Company's cost of​ equity?

b. Growth Company also has preference shares outstanding that pay a $ 1.95 fixed dividend. If these shares are currently priced at $ 27.95​, what is Growth​ Company's cost of preference​ shares?

c. Growth Company has existing debt issued three years ago with a coupon rate of 5.8 %. The firm just issued new debt at par with a coupon rate of 6.9 %. What is Growth​ Company's pre-tax cost of​ debt?

d. Growth Company has 5.2 million ordinary shares outstanding and 1.3 million preference shares​ outstanding, and its equity has a total book value of $ 49.9 million. Its liabilities have a market value of $ 19.6 million. If Growth​ Company's ordinary and preference shares are priced as in parts a and b​, what is the market value of Growth​ Company's assets?

e. Growth Company faces a 38 % tax rate. Given the information in parts a​-d​, and your answers to those​ problems, what is Growth​ Company's WACC?

Answer 1

a)

ke=Dividend per share for next year/current market price + growith rate

=0.90/20.20+4.30%

=4.45%+4.30%

=8.75%

b)

Cost of preference shares = 1.95/27.95 = 6.98%

c)

Cost of Debt= Assuming that amount raised from both the loans is same then pre tax cost would be = (5.8%+6.9%)/2=6.35%

d)

Value of Growth Company's Asset Value = $20.20*5,200,000+$27.95*1300000 +19,600,000

=105,040,000+36,335,000+19,600,000

=$160,975,000

e)

WACC = 8.75%+6.98%+6.35(1-0.38)

=8,75%+6.98%+3.94%

=19.67%