Question

thank you!

Growth Company's current share price is $20.00 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 $1.85 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 5.7%. 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 4.6 million common shares outstanding and 1.4 million preferred shares outstanding, and its equity has a total book value of $50.3 million. Its liabilities have a market value of $20.4 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 Darts (a) through (d), and vour answers to those problems, what is a. What is an estimate of Growth Company's cost of equity? The required return (cost of capital) of levered equity is % (Round to two decimal places.)

Answer 1

a) Cost of equity, re = D1 / P + g = 1.3/ 20 + 4.1% = 10.60%

b) Cost of preferred, rps = D / P = 1.85 / 28.20 = 6.56%

c) Cost of debt, rd = 6.2%

	Value	Weight	Cost
Debt	20.4	13%	6.2%
Preferred	39.48	26%	6.6%
Equity	92	61%	10.6%
Total	151.88	WACC	8.67%