Growth Company\'s current share price is $20.25 and it is expected to pay a $0.9
ID: 2804402 • Letter: G
Question
Growth Company's current share price is $20.25 and it is expected to pay a $0.90 dividend per share next year After that, the frm's dividends are expected to grow at arate of 3.8% per year. a. What is an estimate of Growth Company's cost of equity? b. Growth Company also has proferred stock outstanding that pays a $1.85 per share fixed dividend. If this stock is aurrently priced at $27 96, what is Growth Company's cost of preferred stock? c Grth Company has oxiting debt issued three years ago with a coupon rate of 5 % The firm just issued new debt at par with a coupon rate of 6 2%, what ia Growth Company's cost of debt? d. million common shares outstanding and 1.3 million preferred shares oufstanding, and its equity has a total book value of s50 2 million, Its Growth Company has 4.8 have a market value of $20.2 million. If Growth Company's common and iabilitios Growth Company's assets? Groth 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?Explanation / Answer
a.
Cost of equity = ($0.90 / $20.25) + 3.80%
= 4.44% + 3.80%
= 8.24%
Cost of equity is 8.24%.
b.
Cost of preferred stock = $1.85 / $27.95
= 6.62%
COst of preferred stock is 6.62%.
c.
before tax cost of debt = most recent issue coupon rate = 6.20%
Tax rate = 40%
After tax cost of debt = 6.20% × (1 - 40%)
= 3.72%
Cost of debt is 3.72%.
d.
Market value of equity = 4,800,000 × $20.25
= $97,200,000.
Market value of preferred stock = 1,300,000 × $27.95
= $36,335,000
Market value of debt = $20,200,000
Market value of tpotal capital = $153,735,000.
Weight of equity = 63.23%
Weight of preferrred stock = 23.63%
Weight of debt = 13.14%.
e,
WACC is calculated below:
WACC = (63.23% × 8.24%) + (23.63% × 6.62%) + (13.14% × 3.72%)
= 5.21% + 1.56% + 0.49%
= 7.27%
WACC of company is 7.27%.
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