Question
Gold Diggers, Inc. has 350,000 shares of common stock, currently trading at $26/share. The common stock of Gold Diggers, Inc. is expected to generate a
Gold Diggers, Inc. has 350,000 shares of common stock, currently trading at $26/share. The common stock of Gold Diggers, Inc. is expected to generate a dividend of $2.00/share next year, and it has a Beta calculated at 1.2. It also has 100,000 shares of preferred stock, trading at $50/share. The preferred stock pays dividends of 7%. Finally, Gold Diggers, Inc. has 30,000 bonds currently trading at $960/bond. The coupon rate is 5%, and the bonds will mature in 8 years. Gold Diggers, Inc. expects its dividends to grow at a rate of 6%/year, and it is in a 34% tax bracket. It estimates that the risk-free rate of return is 3% and the market rate of return is 7%.
Calculate the WACC for Gold Diggers, Inc. Be sure to show all your work. NOTE: When calculating the cost of equity, compute the cost using the CAPM method and the DCF (Dividend Constant Growth Method) and average the two.
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