Growth Company\'s current share price is $20.10 and it is expected to pay a $0.9
ID: 2804435 • Letter: G
Question
Growth Company's current share price is $20.10 and it is expected to pay a $0.90 dividend per share next year. After that, the firm's dividends are expected to grow at arate of 4.4% per year. a. What is an estimate of Growth Company's cost of equity? Company's cost of preferred stock? c. Groth Company has existing debt issued three years ago with a coupon rate of 56%. The firm ust issued new debt at par with a cop n rate of 6.4%. What is Growth Company's cost of debt? d. Growth Company has 4.5 million common shares outstanding and 1.2 million preferred shares outstanding, and its equity has a total book value of $50.0 million. Its liabilities have a market value of $20.2 milion. If Growth Company's common and preferred shares are priced as in parts (a) and (b), what is the markat value of Growth Company's assets? o. Gro th Company faces a 40% tax rato. Given the information in parts a) through d and your answers to those problems, what is Gro th Company's WACC?Explanation / Answer
Answer a) Cost of equity = Dividend expected next year / (Price) + Growth rate of dividend
= 0..90 / 20.10 + 4.4%
= 0.044776 + 0.044 = 0.088776 or 8.87%
Answer b) Cost of preferred share = Dividend / Price of preferred = 2.30 / 28 = 0.0821 or 8.21%
Answer c) Cost of debt equals the Yield to maturity of bond
When the debt is issued at PAR the Yield to maturity ie equals to coupon rate hence cost of debt equals to coupon rate i.e 6.4%
Answer d) Total value of equity = price x number of outstanding share = 20.10 x 4500000 = 90450000
Total debt = 20200000
Total preferred share value = price x outstanding shares = 1200000 x 28 = 33600000
Total Market Value = 90450000+20200000+33600000 = 144250000
Answer e)
Weight of equity = 90450000/144250000 = 62.70%
Weight of debt = 20200000/144250000 = 14%
Weight of preferred share = 33600000/144250000 = 23.29%
WACC = Weight of debt*cost of debt * (1-tax rate) + Weight of equity *cost of equity + Weight of preferred share *cost of preferred share
= 62.70%*0.088776*(1-0.40) + 23.29%*0.0821 + 14%*0.0640 = 8.018%
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