No. of shares issued: 80 million Current price per share: $1.20 Dividend just paid: $0.06 Dividend...

No. of shares issued: 80 million

Current price per share: $1.20

Dividend just paid: $0.06

Dividend growth rate: 5% per annum

No. of bonds issued: 50,000

Par value of each bond: $1,000

Coupon rate: 5%

Current yield to maturity: 4.5%

Time to maturity: 3 years

Market data:

10-year government bond yield: 2%

Equity risk premium: 5%

Corporate tax rate: 20%

(a) Employ the dividend growth model to determine FLG’s cost of equity.
(b) Use the capital asset pricing model (CAPM) to determine FLG’s cost of equity.
(c) Discuss the suitability of the dividend growth model and the capital asset pricing model (CAPM) based on the assumptions used to compute the cost of equity.
(d) Compute FLG’s weighted average cost of capital.
(e) Explain why the cost of equity is greater than the cost of debt.
(f) Discuss whether changing the capital structure can lead to reduction in FLG’s cost of capital and increase the value of the company.

Expert Solution

jeff jeffy answered 1 year ago

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