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Please answer parts e ( 1 - 3 ) , f , and g fully. GIVEN INFORMATION: In recent years, EVBOLT Industries has faced challenges
Please answer parts e f and g fully.
GIVEN INFORMATION:
In recent years, EVBOLT Industries has faced challenges due to the high cost of capital, limiting its ability to undertake significant capital investments. However, with a recent decline in capital costs, the company is now considering a substantial expansion program proposed by the marketing department. As an assistant to Leigh Jones, the financial vice president, your initial task is to estimate EVBOLT's cost of capital. Jones has provided relevant data for this task:
The firm's tax rate is
The current price of EVBOLT's coupon, semiannual payment, noncallable bonds with years remaining to maturity is $ The company does not use shortterm interestbearing debt on a permanent basis, and new bonds would be privately placed with no flotation cost.
The current price of the firm's $ par value, quarterly dividend, perpetual preferred stock is $ Flotation costs equal to of the proceeds would be incurred on a new issue.
EVBOLT's common stock is currently priced at $ per share. Its last dividend Do was $ and dividends are expected to grow at a constant rate of The company's beta is the yield
on Tbonds is and the market risk premium is estimated at For the ownbondyieldplusjudgmentalriskpremium approach, the firm uses a risk premium.
EVBOLT's target capital structure is longterm debt, preferred stock, and common equity.
Questions e through g:
e
What is the estimated cost of equity using the discounted cash flow DCF approach?
Suppose the firm has historically earned on equity ROE and has paid out of earnings, and investors expect similar values in the future. How could you estimate the future dividend growth rate? Is this consistent with the growth rate given earlier?
Could the DCF method be applied if the growth rate were not constant? How?
f What is the cost of equity based on the ownbondyieldplusjudgmentalriskpremium method?
g What is your final estimate for the cost of equity?
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