Question

In the previous 5 years, Google paid an annual dividend as follows: Year Dividends 2011 2.7 2010 2.5 2009 2.2 2008 1.8 2007 1.5 Google is expected to pay a dividends of $3 in the next year (2012). What is the cost of equity of Google if its current stock price is $90? 2- As a technology-based firm, Google has a high beta of 1.4. if the risk-free rate of return is 5% and the market risk premium is 3%, calculate the cost of equity of Google using the capital asset pricing model (CAPM)? 3- As a financial analyst, you know that both DGM and the CAPM used in # 1 and # 2 above can be inaccurate, so you decided to calculate the average cost of equity of google. What is the average cost of equity of Google? 4- Google has a preferred stock that pays an annual dividend of 6$ to shareholders. What is the cost of Google’s preferred stocks if it is currently priced at $100? 5- Google has one bond outstanding that matures in 20 years. This bond has a coupon rate of 8%, paid semiannually. The bond currently sells for $1,124. What is the pre-tax cost of debt of Google? 6- Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Use your answers in #3, #4, and #5 to calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%. In the previous 5 years, Google paid an annual dividend as follows: Year Dividends 2011 2.7 2010 2.5 2009 2.2 2008 1.8 2007 1.5 Google is expected to pay a dividends of $3 in the next year (2012). What is the cost of equity of Google if its current stock price is $90? 2- As a technology-based firm, Google has a high beta of 1.4. if the risk-free rate of return is 5% and the market risk premium is 3%, calculate the cost of equity of Google using the capital asset pricing model (CAPM)? 3- As a financial analyst, you know that both DGM and the CAPM used in # 1 and # 2 above can be inaccurate, so you decided to calculate the average cost of equity of google. What is the average cost of equity of Google? 4- Google has a preferred stock that pays an annual dividend of 6$ to shareholders. What is the cost of Google’s preferred stocks if it is currently priced at $100? 5- Google has one bond outstanding that matures in 20 years. This bond has a coupon rate of 8%, paid semiannually. The bond currently sells for $1,124. What is the pre-tax cost of debt of Google? 6- Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Use your answers in #3, #4, and #5 to calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%.

Answer 1

Since, multiple questions have been posted, I have answered the first four.

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Question 1:

Step 1: Calculate Dividend Growth Rate for Each Year

The dividend growth rate for each year is determined as below:

2008 = (Dividend for Year 2008 - Dividend for Year 2007)/Dividend for Year 2007*100 = (1.8 - 1.5)/1.5 = 20%

2009 = (Dividend for Year 2009 - Dividend for Year 2008)/Dividend for Year 2008*100 = (2.2 - 1.8)/1.8 = 22.22%

2010 = (Dividend for Year 2010 - Dividend for Year 2009)/Dividend for Year 2009*100 = (2.5 - 2.2)/2.2 = 13.64%

2011 = (Dividend for Year 2011 - Dividend for Year 2010)/Dividend for Year 2010*100 = (2.7 - 2.5)/2.5 = 8%

2012 = (Dividend for Year 2012 - Dividend for Year 2011)/Dividend for Year 2011*100 = (3 - 2.7)/2.7 = 11.11%

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Step 2: Calculate Average Dividend Growth Rate

The average dividend growth rate is calculated as below:

Average Dividend Growth Rate = (Growth Rate 2008 + Growth Rate 2009 + Growth Rate 2010 + Growth Rate 2011 + Growth Rate 2012)/Number of Years = (20% + 22.22% + 13.64% + 8% + 11.11%)/5 = 15%

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Step 2: Calculate Cost of Equity

The cost of equity is arrived as follows:

Cost of Equity = Dividend Next Year/Current Stock Price + Growth Rate = 3/90 + 15% = 18.33%

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Question 2)

The cost of equity of Google using the capital asset pricing model (CAPM) is calculated as follows:

Cost of Equity = Risk Free Rate + Beta*Market Risk Premium

Substituting values in the above formula, we get,

Cost of Equity = 5% + 1.4*3% = 9.20%

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Question 3)

The average cost of equity of Google is determined as follows:

Average Cost of Equity of Google = (Cost of Equity under DGM + Cost of Equity under CAPM)/2 = (18.33% + 9.20%) = 13.77%

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Question 4)

The cost of Google’s preferred stocks is arrived as below:

Cost of Preferred Stock = Annual Dividend/Current Stock Price*100

Substituting values in the above formula, we get,

Cost of Preferred Stock = 6/100*100 = 6%