Question

Growth​ Company's current share price is

$ 19.85$19.85

and it is expected to pay a

$ 1.25$1.25

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

4.1 %4.1%

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

$ 2.15$2.15

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

$ 28.20$28.20​,

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 %6.5%.

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

4.94.9

million common shares outstanding and

1.11.1

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

$ 50.2$50.2

million. Its liabilities have a market value of

$ 19.7$19.7

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

40 %40%

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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