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BHP Billiton, an Australian company, just paid $0.65 as a dividend, which is expected to grow at 4.0 per cent. Its most recent stock price

BHP Billiton, an Australian company, just paid $0.65 as a dividend, which is expected to grow at 4.0 per cent. Its most recent stock price is $72. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 103 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. This year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely.

Answer the following five (5) questions based on the above information

What is the cost of equity (%)?

What is the post-tax cost of debt (%)?

What is the WACC (%)?

What is the value of the company ($)? 

What is the price per share ($)?

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SOLUTION To calculate the cost of equity we can use the dividend discount model DDM Cost of equity Dividend Stock price Dividend growth rate Cost of e... blur-text-image

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