Question

Growth Company's current share price is $19.90 and it is expected to pay a $1.05 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 preferred stock outstanding that pays a $2.05 per share fixed dividend. If this stock is currently priced at $28.00, 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 6.8%. What is Growth Company's cost of debt? d. Growth Company has 4.8 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 $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. a. What is an estimate of Growth Company's cost of equity? %. (Round to two decimal places.) The required return (cost of capital) of levered equity is

Answer 1

1.
=1.05/19.90+4.3%
=9.5764%

2.
=2.05/28
=7.3214%

3.
=6.8%

4.
=19.8+1.4*28+4.8*19.90
=154.5200000

5.
=(19.8*6.8%*(1-35%)+1.4*28*(2.05/28)+4.8*19.90*(1.05/19.90+4.3%))/(19.8+1.4*28+4.8*19.90)
=8.3436%