Question
Q1. Cindy Scott is an analyst with a firm in Vancouver, Canada. She is responsible for covering one company in the energy industry. Scott believes
Q1. Cindy Scott is an analyst with a firm in Vancouver, Canada. She is responsible for covering one company in the energy industry. Scott believes the domestic and global economies will grow slightly below average over the next two years, but she is also concerned about the possibility of a mild recession taking hold. She wants to study if the companys debt to equity ratio needs adjustment, so she calculates the following information for the company. The companys cost of equity is 12% and its pre-tax cost of debt is 4.5%. The weighted average cost of capital is 9.6%. The tax rate is 40%. What is the companys current debt to equity ratio? (3)
Q2. Company XYZ has 60 million shares of stocks traded at a current market price of $120. It also has outstanding debt of $3 billion with a pre-tax cost of debt at 10%. You calculate that the Beta of this company is 1.5 and the book value of stock is $80 per share. Tax rate is 30%. What is the WACC of the company? (Assume market risk premium is 8% and risk-free rate is 2%). (3)
Q3. Suppose company ABC just issued a dividend of $1.88 per share on its common stock. The company paid dividends of $1.50, $1.59, $1.68, and $1.77 per share in the last four years. If the stock currently sells for $51, what is your best estimate of the companys cost of equity capital using the arithmetic average growth rate in dividends? What if you use the geometric average growth rate? (4)
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