Growth Company's current share price is $20.00 and it is expected to pay a $1.25 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 4.2% 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 $2.25 per share fixed dividend. If this stock is currently priced at $28.15, what is Growth Company's cost of preferred stock?
c. Growth Company has existing debt issued three years ago with a coupon rate of 5.5%. The firm just issued new debt at par with a coupon rate of 6.1%. What is Growth Company's cost of debt?
d. Growth Company has 5.1 million common shares outstanding and 1.2 million preferred shares outstanding, and its equity has a total book value of $49.9 million. Its liabilities have a market value of $19.5 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 40% 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.
a. Cost of equity =Dividend Next Year/Price +Growth
=1.25/20+4.2% =10.45%
b. Cost of Preferred Dividend =Dividend/Price =2.25/28.15
=7.99%
c.Since debt is sold at par , Hence cost of debt =6.1%
d, Market value of common shares =Number of Shares*Share Price
=5100000*20 =102,000,000 or 102 million
Market value of Preferred Sock =Number of Shares*Share Price of
Preferred Stock =1200000*28.15 =33780000 or 33.78 million
Market Value of Liabilities =19.5 million
Market Value of Total Assets =102+33.78+19.5 =155.28 million
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