year Growth Company\'s current share price is $20.25 and it is expected to pay a
ID: 2793851 • Letter: Y
Question
year Growth Company's current share price is $20.25 and it is expected to pay a $0.85 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 3.6% per 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 per share fixed dividend. If this stock is currently priced at $27.95, what is Growth Companys cost of preferred stock? c Growth Company has existing debt issued three years ago with a coupon rate of 6.1%. The firm just issued new debt at par with a coupon rate of 6.5%. What is Growth Company's cost of debt? d. Growth Company has 4.6 million common shares outstanding and 1.3 million preferred shares outstanding, and its equity has a total book value of S50.0 million. Its liabilities have a market value of $20.4 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 35% tax rate. Given the information in parts a through d and your answers to those problems, what is Growth Company's AC ?Explanation / Answer
a) Cost of equity = D1/Po +g
D1= Dividend, Po= Price of share, g = growth rate
Ke = 0.85/20.25 + 0.036
0.0419 + 0.036
=0.07797
I.e. 7.797%
b) Cost of preference shares = Dividend / price of Pref. share
=2.15/27.95
=0.0769
ie 7.69%
C)Cost of debt = interest rate(1-tax rate)
=6.5%(1-35%)
=6.5%(0.65)
=4.225%
D) Value of company's asset = Market value oof equity share + Market value of Pref. shares + market value of liability
=(4.6 million*20.25) + (1.3 million*27.95) + 20.4 million
93.15+36.335 + 20.4
=149.885 million
E) Statement showing WACC
Source of capital Value Weight K WACC = Weight*k Equity 93.15 62% 7.80% 4.85% Pref 36.335 24% 7.69% 1.86% Debt 20.4 14% 4.23% 0.58% 149.885 7.28%Related Questions
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