Question

Growth​ Company's current share price is $ 20.30 and it is expected to pay a $ 1.10 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 3.6 %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 $ 2.00 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 6.5%.The firm just issued new debt at par with a coupon rate of 6.8%. What is Growth​ Company's cost of​ debt?

d. Growth Company has 4.6 million common shares outstanding and 1.5 million preferred shares​ outstanding, and its equity has a total book value of $ 50.1 million. Its liabilities have a market value of $ 20.1 million. If Growth​ Company's common and preferred shares are priced as in parts ​(a​) and ​(b​), what is the market value of Growth​ Company's assets?

e. Growth Company faces a 38 % 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

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