Question

Growth​ Company's current share price is $20.15 and it is expected to pay a $1.30 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 4.1% per year.

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

b. Growth Company also has preferred stock outstanding that pays a $2.15 per share fixed dividend. If this stock is currently priced at $28.20​, what is Growth​ Company's cost of preferred​ stock?

c. Growth Company has existing debt issued three years ago with a coupon rate of 5.9%.The firm just issued new debt at par with a coupon rate of 6.2%. What is Growth​ Company's cost of​ debt?

d. Growth Company has 5.5 million common shares outstanding and 1.1 million preferred shares​ outstanding, and its equity has a total book value of $50.2 million. Its liabilities have a market value of $19.8 million. If Growth​ Company's common and preferred shares are priced as in parts

​(a​)

and

​(b​),

what is the market value of Growth​ Company's assets?e. Growth Company faces a 35% tax rate. Given the information in parts

​(a​)

through

​(d​),

and your answers to those​ problems, what is Growth​ Company's WACC?

​Note: Assume that the firm will always be able to utilize its full interest tax shield.

The required return​ (cost of​ capital) of levered equity is

nothing​%.

​(Round to two decimal​ places.)

Answer 1

a. Share price = $ 20.15, D1 = $ 1.30, g or growth rate = 4.1%

Share price = D1/r - g where r is the cost of equity.

r = D1/Share price + Growth rate = 1.30/20.15 + 4.1% = 10.55%

b. Cost of preferred stock = Dividend/Share price = 2.15/28.20 = 7.62%

c. The cost of newly issued debt is 6.2% (Coupon rate = yield as it is issued at par). This is the cost of debt for the firm.

d. Total market value = Common stock outstanding * Share price + Preferred stock outstanding * Share price + Value of debt =  5.5 million * 20.15 + 1.1 million * 28.20 + 19.8 million = $ 161.65 million

e. WACC = After tax Cost of debt * weight of debt + Cost of equity * weight of equity + Cost of preferred stock * weight of preferred stock = 6.2% * (1 - 35%) * (19.8/161.65) + 10.55% * (110.83/161.65) + 7.62% * (31.02/161.65) = 9.19%

answered by: anonymous