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Growth 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

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Growth 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 rate of 4% 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 $2 per share fixed dividend. If this stock is currently priced at $28, 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%. The firm just issued new debt at par with a coupon rate of 6.5%. What is Growth Company's cost of debt? d. Growth Company 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 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 35% 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. Answer: a. The company's cost of equity is %. (Round to two decimal places.) b. The company's cost of preferred stock is % (Round to two decimal places.) c. 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 the YTM of the debt. Thus, the pre-tax cost of debt is % (Round to two decimal places.) d. The company's market value of assets is the market value of its debt plus the market value of its equity. Thus, the company's market value of assets is $ million. (Round to two decimal places.) e. The company's weighted average cost of capital is % (Round to two decimal places.)

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