Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Growth Company's current share price is $19.85 and it is expected to pay a $1.05 dividend per share next year. After that, thefirm's dividends are

Growth Company's current share price is

$19.85

and it is expected to pay a

$1.05

dividend per share next year. After that, thefirm's dividends are expected to grow at a rate of

4.1%

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

$1.95

per share fixed dividend. If this stock is currently priced at

$27.85,

what is Growth Company's cost of preferred stock?c. Growth Company has existing debt issued three years ago with a coupon rate of

6.4%.

The firm just issued new debt at par with a coupon rate of

6.2%.

What is Growth Company's cost of debt?d. Growth Company has

4.7

million common shares outstanding and

1.1

million preferred shares outstanding, and its equity has a total book value of

$50.0

million. Its liabilities have a market value of

$20.1

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

25%

tax rate. Given the information in parts

(a)

through

(d),

and your answers to those problems, what is Growth Company's WACC?

Note: Assume that the firm will always be able to utilize its full interest tax shield.

a. What is an estimate of Growth Company's cost of equity?

The required return (cost of capital) of levered equity is

9.399.39%.

(Round to two decimal places.)b. Growth Company also has preferred stock outstanding that pays a

$1.95

per share fixed dividend. If this stock is currently priced at

$27.85,

what is Growth Company's cost of preferred stock?The cost of capital for preferred stock is

7.007.00%.

(Round to two decimal places.)c. Growth Company has existing debt issued three years ago with a coupon rate of

6.4%.

The firm just issued new debt at par with a coupon rate of

6.2%.

What is Growth Company's cost of debt? (Select from the drop-down menus.)The pre-tax cost of debt is the firm's YTM on current debt. Since the firm recently issued debt at par, then the coupon rate of that debt must be

equal to

less than

greater than

equal to

the YTM of the debt. Thus, the pre-tax cost of debt is

6.2%

6.2%

6.4%

. d. Growth Company has

4.7

million common shares outstanding and

1.1

million preferred shares outstanding, and its equity has a total book value of

$50.0

million. Its liabilities have a market value of

$20.1

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?The market value of assets is

$144.03144.03

million.(Round to two decimal places.)e. Growth Company faces a

25%

tax rate. Given the information in parts

(a)

through

(d),

and your answers to those problems, what is Growth Company's WACC?The weighted average cost of capital is

nothing%.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance Principles And Practice

Authors: Denzil Watson, Tony Head

1st Edition

0273630083, 978-0273630081

More Books

Students also viewed these Finance questions