Question

Please answer them all in a time crunch and I only have 2 questions left in my subscription.

1. The Brady Company has a beta of 1.2 and just paid a $5 dividend. Dividends are expected to grow at a constant 4% per year. The risk free rate is 4% and the expected return on the market is 10%. At what price would Brady stock be fairly priced?

2. Omaha Company's capital structure is 48% equity, 37% debt, 15% preferred stock. It has a pretax cost of debt of 9% and a marginal tax rate of 40%. Its cost of equity is 14%, its beta is 1.8%, and its cost of preferred stock is 8.5%. What is Omaha Company's weighted average cost of capital?

3. Elephant Company has 200,000 shares of common stock outstanding. It just paid a common dividend of $5 per share, and its common stock currently sells for $140 per share. Elephant Company has 25,000 shares of preferred stock outstanding. The preferred stock pays and annual dividend of $2.00 per share and currently sells for $30 per share. Elephant Company has 10,000 7% bonds outstanding. The bonds have a face value of $1,000 and mature in 10 years. The bonds currently sell for $865. Elephant Company has a Beta of .80, and its marginal tax rate is 40%. The risk free rate is 4%. The required return on the market is 12%. What is the Cost of Preferred Stock?

4. Elephant Company has 200,000 shares of common stock outstanding. It just paid a common dividend of $5 per share, and its common stock currently sells for $140 per share. Elephant Company has 25,000 shares of preferred stock outstanding. The preferred stock pays and annual dividend of $2.00 per share and currently sells for $30 per share. Elephant Company has 10,000 7% bonds outstanding. The bonds have a face value of $1,000 and mature in 10 years. The bonds currently sell for $865. Elephant Company has a Beta of .80, and its marginal tax rate is 40%. The risk free rate is 4%. The required return on the market is 12%. What is Elephant Company's Cost of Debt?

5. Elephant Company has 200,000 shares of common stock outstanding. It just paid a common dividend of $5 per share, and its common stock currently sells for $140 per share. Elephant Company has 25,000 shares of preferred stock outstanding. The preferred stock pays and annual dividend of $2.00 per share and currently sells for $30 per share. Elephant Company has 10,000 7% bonds outstanding. The bonds have a face value of $1,000 and mature in 10 years. The bonds currently sell for $865. Elephant Company has a Beta of .80, and its marginal tax rate is 40%. The risk free rate is 4%. The required return on the market is 12%. What is Elephant Company's Cost of Equity?

Answer 1

1.) According to CAPM, Required return(r) = Risk free rate + Beta*(Market return-Risk free rate)

= 4 +1.2*(10-4) = 11.2%

Stock price = D0*(1+g)/(r-g)

Where, D0 is the dividend paid

g is growth rate

r is required return on equity

Therefore, stock price = 5*(1+0.04)/(0.112-0.04)

= $72.22

2). WACC = Cost of equity*% of Equity+ Cost of Debt*% of Debt*(1-tax rate) +Cost of preferered stock*% of Preferred stock

= 14*0.48 + 9*0.37*(1-0.40) + 8.5*0.15

= 9.99%

3). Cost of preferred stock = Dividend/Price

= 2/30 = 6.67%

4). Cost of Debt is calculated in excel below

Therefore, cost of Debt = 9.1142%

5). Cost of equity = Risk free rate + Beta*(Market return-Risk free return)

= 4 + 0.80*(12-4) = 10.4%