Question
D 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
D 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 constant rate of 4% per year.
1) what is an estimate of D's cost of capital? (hint: thinking about $1 dividend is D1 or D0 when you apply the formula)
2)D also has preferred stock outstanding that pays a $2 per share fixed dividend and the preferred stock is currently priced at $28, What is D's cost of preferred stock?
3) D 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 D's common and preferred shars are priced as in question 1 and 2, what is the market value of D's total assets? and what are the weights of common stock, preferred stock and debt respectively?
4) D faces a 40% tax rate and 6% pretax cost of debt. Given the information in questions 1 to 3 and your answers to those problems, what is D's WACC?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started