Question
Calculate the company's weighted average cost of capital (WACC) using all of the information below. Be sure to calculate the cost of equity using the
Calculate the company's weighted average cost of capital (WACC) using all of the information below. Be sure to calculate the cost of equity using the dividend discount model and the capital asset pricing model. In addition, state the current yield for the bonds and the dividend yield for the common shares.
Equity Information:
50 million shares outstanding; market price = $80 per share; book value = $75 per share, beta = 1.15
Expected market return = 14%; risk-free rate = 5%; The previous dividend was $7.4109
The firm's dividend is expected to grow by 5.25% forever.
Debt Information:
$1,000,000,000 in outstanding debt (face value); current quote = 108.560
coupon rate = 9% paid annually; 15 years to maturity; tax rate = 40%
Preferred Stock:
5 million shares outstanding; dividend = $10; market price = $111.10
Context: Calculating WACC using CAPM and Dividend discount model for calculating cost of equity
Explanation: CAPM is used for pricing risky securities and generating the expected returns when the associated risks and cost of capital of the respective asset have been provided. The dividend discount model calculates the stock value irrespective of market conditions.
Step by Step Solution
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Steps to calculate the WACC 1 Cost of Equity using CAPM Ke Rf Rm Rf 5 11514 5 5 115 9 1285 2 Cost of Equity using Dividend Discount Model Ke Dividend1 ...Get Instant Access to Expert-Tailored Solutions
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Step: 3
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