Question

Growth​ Company's current share price is

$ 20.00$20.00​,

and it is expected to pay a

$ 1.30$1.30

dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of

3.9 %3.9%

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$2.25

per share fixed dividend. If this stock is currently priced at

$ 28.05$28.05​,

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 %5.7%.

The firm just issued new debt at par with a coupon rate of

6.4 %6.4%.

What is Growth​ Company's cost of​ debt?

d. Growth Company has

5.45.4

million common shares outstanding and

1.21.2

million preferred shares​ outstanding, and its equity has a total book value of

$ 49.9$49.9

million. Its liabilities have a market value of

$ 20.4$20.4

million. If Growth​ Company's common and preferred shares are priced at

$ 28.05$28.05

and

$ 20.00$20.00​,

​respectively, what is the market value of Growth​ Company's assets?

e. Growth Company faces a

35 %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