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In: Accounting

Common stock: 265,000 shares of common stock selling for $76 per share. The stock has a...

Common stock: 265,000 shares of common stock selling for $76 per share. The stock has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year indefinitely.

Preferred stock: 7,500 shares of 6 percent preferred stock (par value $100) selling at $88 per share.

Debt: 8,500 units of 7.1 percent coupon bonds outstanding, with 14 years to maturity and a quoted price of 102.6%. These bonds pay interest semi-annually.

Market: A 13.2 percent expected return, a 4.5 percent risk-free rate, and a 34 percent tax rate.

REQUIRED: (a)

Calculate the market value of common stock, preferred stock, bond and the total market value of the firm.

(b)

Calculate the cost of common stock using Constant Dividend Growth Model (CDGM) and Capital Assets Price Model (CAPM) respectively. What is the average cost of common stock based on these two models?

(c)

Calculate the cost of preferred stock.

(1 mark)

(d)

Calculate: (i) cost of debt before tax; and (ii) cost of debt after tax.

(e)

Calculate the weight of common stock (we), the weight of preferred stock (wp) and the weight of debt (wd) with respect to the total capital.

(f)

Calculate the weighted average of cost of capital (WACC).

Solutions

Expert Solution

ekkarill92 answered 1 year ago
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