Growth Company\'s current share price is $20.15 and it is expected to pay a $0.8
ID: 2801065 • Letter: G
Question
Growth Company's current share price is $20.15 and it is expected to pay a $0.85 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 $2.15 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 5.6%. 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 4.5 million common shares outstanding and 1.1 million preferred shares outstanding, and its equity has a total book value of $50.2 million. Its liailities have a market value of $19.6 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 38% tax rate. Given the information in parts (a) through (d), and your answers to those problems, what is Growth Company's WACC? a. What is an estimate of Growth Company's cost of equity? The required return (cost of capital) of levered equity is b. Growth Company also has preferred stock outstanding that pays a $2.15 per share fixed dividend. If this stock is currently priced at $28.00, what is Growth Company's cost of preferred stock? The cost of capital for preferred stock is%. C Growth Company has existing debt issued three years ago with a coupon ate of 5.6%. The firm ust issued ne debt at par with a coupon rate of 6.1%. What is Growth Compan s cost of debt? The pre-tax cost of debt is the firm's YTM on current debt. Since the firm recently issued debt at par, then the coupon rate of that debt must be (Round to two decimal places.) Round to two decimal places.) Select from the drop-down menus. the YTM of the debt. Thus, the pre-tax cost of debt is d. Growth Company has 4.5 million common shares outstanding and 1.1 million preferred shares outstanding, and its equity has a total book value of $50.2 million. Its liabilities have a market value of $19.6 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? The market value of assets is Smillion. (Round to two decimal places.) e. Growth Company faces a 38% tax rate. Given the information in parts (a) through (d), and your answers to those problems, what is Growth Company's WACC? The weighted average cost of capital is%. (Round to two decimal places.)Explanation / Answer
Answer a) Stock price = Expected dividend / (Cost of equity - growth rate)
20.15 = 0.85 / (Cost of equity - 0.041)
Cost of equity -0.041 = 0.85 / 20.15
Cost of equity = 0.083184 or 8.318%
Answer b) Cost of capital of preferred stock = Fixed dividend / Price of preferred stock = 2.15 / 28 = 7.679%
Answer c) Since the bond is issued at par the coupon rate = Yield to maturity of the bond hence the cost of debt is equal to coupon rate i.e 6.1%
Answer d)
Total market value of common equity = number of shares x share price = 4500000 x 20.15 = 90675000
Total market value of preferred shares = number of shares x share price = 1100000 x 28 = 30800000
Market value of debt = 19600000
Total Market Value = 19600000+90675000+30800000 = 141075000
Answer e)
WACC =
weight of debt *cost of debt*(1-tax rate) + weight of equity * cost of equity + weight of preferred stock * cost of preferred share
Weight of debt = 19600000/141075000 = 13.893%
Weight of preferred share = 30800000/141075000 = 21.832%
Weight of equity = 90675000/141075000 = 64.274%
WACC = 64.274%*8.32% + 21.832%*7.679%+13.839%*6.10%*(1-0.38) = 7.55%
WACC = 7.55%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.