Question

Growth​ Company's current share price is $19.85​, 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 a rate of 3.7% 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 $2.25 per share fixed dividend. If this stock is currently priced at $28.25​, what is Growth​ Company's cost of preferred​ stock?

c. Growth Company has existing debt issued three years ago with a coupon rate of 5.7%. 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 4.6 million common shares outstanding and 1.1 million preferred shares​ outstanding, and its equity has a total book value of $50.0 million. Its liabilities have a market value of $20.3 million. If Growth​ Company's common and preferred shares are priced at $19.85 and $28.25​, ​respectively, what is the market value of Growth​ Company's assets?

e. Growth Company faces a 35% tax rate. Given the information in parts a through d and your answers to those​ problems, what is Growth​ Company's WACC?

​Note: Assume that the firm will always be able to utilize its full interest tax shield.

Answer 1