Honda is considering increasing production after unexpected strong demand for its new motorbike. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information: - The company wants to maintain is current capital structure, which is 20% equity, 20% preferred stock and 60% debt. - The firm has marginal tax rate of 34%. - The firm's preferred stock pays an annual dividend of $4.8 forever, and each share is currently worth $135.26. - The firm has one bond outstanding with a coupon rate of 6%, paid semiannually, 10 years to maturity, a face value of $1,000, and a current price of $864.1. - New preferred stock and bonds would be issued by private placement, largely eliminating flotation costs. - Honda's beta is 0.4 , the yield on Treasury bonds is is 3.2% and the expected return on the market portfolio is 6%. - The current stock price is $41.6. The firm has just paid an annual dividend of $1.2, which is expected to grow by 4% per year. - New equity would come from retained earnings, thus eliminating flotation costs. Part 1 Attempt 1/10 for 10 pts. What is the (pre-tax) cost of debt? Part 2 Attempt 1/10 for 10pts. What is cost of preferred stock? Part 3 Attempt 1/10 for 10 pts. What is the cost of equity using the CAPM? Part 4 Attempt 1/10 for 10 pts. What is the cost of equity using the dividend growth model? What is your best guess for the cost of equity if you think both approaches are equally valid? Part 6 What is the company's weighted average cost of capital? Honda is considering increasing production after unexpected strong demand for its new motorbike. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information: - The company wants to maintain is current capital structure, which is 20% equity, 20% preferred stock and 60% debt. - The firm has marginal tax rate of 34%. - The firm's preferred stock pays an annual dividend of $4.8 forever, and each share is currently worth $135.26. - The firm has one bond outstanding with a coupon rate of 6%, paid semiannually, 10 years to maturity, a face value of $1,000, and a current price of $864.1. - New preferred stock and bonds would be issued by private placement, largely eliminating flotation costs. - Honda's beta is 0.4 , the yield on Treasury bonds is is 3.2% and the expected return on the market portfolio is 6%. - The current stock price is $41.6. The firm has just paid an annual dividend of $1.2, which is expected to grow by 4% per year. - New equity would come from retained earnings, thus eliminating flotation costs. Part 1 Attempt 1/10 for 10 pts. What is the (pre-tax) cost of debt? Part 2 Attempt 1/10 for 10pts. What is cost of preferred stock? Part 3 Attempt 1/10 for 10 pts. What is the cost of equity using the CAPM? Part 4 Attempt 1/10 for 10 pts. What is the cost of equity using the dividend growth model? What is your best guess for the cost of equity if you think both approaches are equally valid? Part 6 What is the company's weighted average cost of capital
