Bubba Equipment has the following financial information: 1) 50,000 bonds outstan

Question

Bubba Equipment has the following financial information:

1) 50,000 bonds outstanding with a 20 year maturity and 4 % annual coupon, selling for $950

2) 500,000 shares of 5 percent preferred stock. $100 par value per share, selling for $80 per share

3) 2.0 million shares of common stock outstanding. beta of 1.20. sells for $50 a share. recen annual dividend was $3 and projected growh rate is 6%

(the us treasury bill is yielding 3 percent)
(return on the market is 10 percent)

(corporate tax rate is 30 percent)

take everything to 4 decimal places

Q: What is the cost of equity using the gordon growth model?

Explanation / Answer

Expectd dividend=3*1.06=3.18

Cost of equity=Expected Dividend/Share price+growth rate=3.18/50+6%=12.36%

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