Growth Companys current share price is ($20) and it is expected to pay a ($1) dividend per
Question:
Growth Company’s current share price is \($20\) and it is expected to pay a \($1\) dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% 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 \($2\) per share fixed dividend. If this stock is currently priced at \($28\), 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%. The firm just issued new debt at par with a coupon rate of 6.5%. What is Growth Company’s pretax cost of debt?
d. Growth Company has 5 million common shares outstanding and 1 million preferred shares outstanding, and its equity has a total book value of \($50\) million. Its liabilities have a market value of \($20\) 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 WACC?
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