Question

1. ABC currently has outstanding 12-year bond with 7% coupon that pays semiannually; the current market price is $1075. What is ABC’s cost of debt?

2. ABC’s beta is 1.15, the 20-year T-bond has a yield to maturity (YTM) of 3.25%, and the market risk premium is 7.5%. What is ABC’s cost of common stock?

3. ABC’s preferred dividend is $3.75 dollar and the price of ABC’s preferred stock is $50. What is ABC’s cost of preferred stock?

4. Last year, ABC had earning per share (EPS) of $3.5, and ABC paid $1.6 in dividend per share. Given ABC’s ROE is 9%, what is ABC’s growth rate for common stock?

5. 6 years ago, ABC issued $20 million bond at par. Assume this is the only bond that ABC has now. What is the market value of debt for ABC? (Hint: check previous parts for necessary information)

6. Assume ABC’s dividend will continue to growth as the same pace as before, what is ABC’s share price should be?

7. Assume ABC has 3.25 million common shares outstanding, what is the market value of common stock?

8. Assume ABC has $8 million preferred stock, what are market value weighted for debt, preferred stock and common stock?

9. What is ABC’s cost of capital? Assume ABC’s marginal tax rate is 25%.

10. If ABC is considering a new project for $50 million. They can borrow $15 million from debt, $5 million preferred stocks, and financing the remaining in retained earnings (part of common stock). Assume ABC will carry the same cost for each source of capital, what is ABC’s cost of capital on this new project?

  

11. Assume the project will produce $14m Free Cash Flows (FCF) in the first year, $16m FCF in the second year, $18m FCF in the third year, and ABC plans to stop the project at the end of year 3. Assume the cost for the project is $50m, and they can sell the project for $15M (Terminal value) at the end of the project. What is the NPV for this project?

12. What is IRR for the project?

13. Comments on NPV and IRR with a few sentences

HELP WITH QUESTION 6