Question Discoverit! Company has just paid $1.2 dividend payment and they promise to increase dividend payments by 2.5%. The current stock price is $18 and has 500,000 outstanding shares. Calculate cost of equity, based on DGM. The company has a beta of 0.8 and market risk premium is 4.5%. Risk free rate is 2%. Calculate cost of equity, based on SML. Discoverit! has only one bond outstanding with a maturity period of 15 years. The bond makes semiannual coupon payments and the coupon rates is 11%. The selling price of the bond is $1,067 and face is $1,000. The tax rate is 21% and the company has 2,500 bonds outstanding. Calculate before and after-tax cost of debt. Calculate WACC using SML approach to calculate Cost of Equity. Calculate WACC using Dividend Growth Model approach to calculate Cost of Equity. A B D E F G H 1 J K M COST OF EQUITY WEIGHTS 1 2 1. Dividend Growth Model (DGM) Approach 3 DO/D1? 4 G 5 PO 6 Required Return/Cost of Equity 7 1.2 3% 18 2. SML Approach Risk-free rate Beta E(Rm)-Rf E(Rstock)/Cost of Equity 2% 0.8 Stock Price Bond Price 18 Stocks outstanding 1067 Bonds outstanding 500,000 EQUITY 2,500 DEBT VALUE OF FIRM 8% Weight of Equity Weight of Debt 8 9 Semiannual-Coupon Payment Bond 10 N 11 Coupon Rate 12 Price 13 Face COST OF DEBT You can modify N, calculate PMT in this column. 15 years 11% 1,067 1,000 WACC - Based on SML Approach (Use E6 for cost of equity) Remember the formula: WACC=Cost of Equity x Weight of Equity + After-tax Cost of Debt x Weight of Debt where you use E(Rstock) for Cost of Equity 14 Rate - Period Rate 15 YTM - Before-tax Cost of Debt 16 Tax Rate 17 After-tax Cost of Debt WACC - Based on Dividend Growth Model (Use B6 for Cost of Equity) Remember the formula: WACC=Cost of Equity x Weight of Equity + After-tax Cost of Debt x Weight of Debt where you use Required Return for Cost of Equity 21%